Sales Tax Slice: Will Complying with the Marketplace Fairness Act Take the Wind Out of Your Company’s “Sales?”

The Marketplace Fairness Act passed the Senate on May 6 and is heading to the House, where it is likely to face stiffer opposition. While its fate remains uncertain, one of the few things remote sellers can bank on is that they will continue to face a rapidly changing compliance landscape, regardless of what happens to the federal bill.

If the bill is enacted in its current form, remote sellers whose sales exceed the $1 million annual threshold will be faced with collecting sales tax for 46 states and the District of Columbia. “That’s going to require some planning and it’s going to be a serious implementation challenge,” said Harley Duncan, managing director and state and local tax leader in KPMG’s Washington National Tax practice.

Even with the simplification requirements that are included in the legislation, Duncan pointed out that remote sellers would still have to keep track of business registration requirements in jurisdictions where they conducts sales, determine whether goods or services are properly classified as “taxable” or “exempt,” monitor state and local tax rate changes, timely collect and pay tax, and maintain records in case of an audit.

“It’s not that that’s insurmountable, the simplification provisions in the bill help,” Duncan said, adding that dealing with it will take work. “It’s not at all too early to consider how to deal with it,” he said. 

Jeremiah T. Lynch, principal at Ryan, said the bill’s implementation and compliance looks simple on the surface but presents complex issues. Rules on whether compliance is monthly, quarterly, etc., would have to be determined. Businesses without tax departments would have to figure out how they would deal with complying with the sales tax laws of so many jurisdictions.

“That’s just the tip of the iceberg, the rest of the iceberg sunk the Titanic,” Lynch said.

In any regard, Lynch said e-commerce companies should be thinking about the possibility that the legislation will pass, and what system might provide them with all the information they need to comply. And he said every industry that has become an e-commerce industry has to figure out what works best for them.

If the bill fails, both Lynch and Duncan advised that the issue of collecting tax from online sales will continue to come up.

Over the past four or five years, Duncan said states have tried to expand the concept of nexus, such as by passing “click-through nexus” bills and embracing affiliate nexus (creating nexus for an out-of-state seller based on the seller’s parent or affiliated corporation being physically present and operating in the state).

“I think you’ll see states continuing to propose that type of legislation,” Duncan said. And that means continued risk and uncertainty for remote sellers. “The interest in this issue will not go away. People’s interest in purchasing things online will not diminish.”

By Rebecca Helmes