Is your wholesale business prepared for the Marketplace Fairness Tax?

By May 7, 2013 Uncategorized

So the Senate just passed S 743 the Marketplace Fairness Act of 2013.  That’s no surprise.  For the most part, the goal of this legislation is to get non-resident vendors to collect tax from customers in the destination state.  This bill applies only to companies with remote sales of over $1 million.  There are a lot of e-commerce companies with sales less than $1 million who will not be impacted by this Act.

Because this Act is enforced separately by each state based upon the rules of their state, you may end up with a wide range of enforcement rules and different outcomes.  I am also concerned that wholesalers may be swept up in this issue and have to take on a much larger effort at compliance.  I am especially concerned with the impact on 3rd party drop-shipment transactions.

A lot of wholesalers don’t have nexus outside of just few states but they may have sales being shipped to a large number of states.  Because these companies don’t have nexus in the destination state, they may not have valid resale exemption certificates from customers who are located in that state.  Because of the way the term “remote sale” is defined in the law, it sounds like even wholesalers who are only selling to other retailers may now need to increase their collection of resale certificates in each of the states where they have customers.  The failure to have this certificate could create a taxable transaction during an audit by any state that has adopted this new provision.

This could become even more significant when dealing with 3rd party drop-shipments.  In these cases, a vendor requests that his supplier ship products directly to one of the vendor’s customers.  Historically, if neither the vendor nor the supplier had nexus in the state where the customer was located, then no tax was charged and the customer had the obligation of paying use tax if the product was taxable.  Now, however, it may be necessary for both the vendor and the supplier to be registered in any number of states so that resale certificates can be issued to support exempt sales.  This could create a real nightmare for wholesalers and companies that don’t make taxable sales.

I don’t want to be too suspicious of the motivation of some of the states that will adopt this Act, but my experience tells me that most of them will attempt to enforce this as aggressively as possible.  If you are a wholesaler don’t just assume that this Act does not impact your business, I think it does.

Ned Lenhart, CPA
Interstate Tax Strategies, P.C.