What does 2014 have in store for sales tax? The Marketplace Fairness Act, cloud computing, and taxation of services are among the big issues to watch this year, according to state tax experts in a 2014 Outlook article that will be published by Bloomberg BNA later this month.
The Marketplace Fairness Act (S. 743/H.R. 684) is a sure newsmaker – even reaching beyond the SALT crowd to the mainstream. If it passes in its current form, the act would allow states to impose sales tax on remote sellers if their remote sales exceed $1 million in the preceding calendar year. However, when the MFA might come up for discussion in Congress again is unclear. It passed the Senate in May, but it has been languishing in the House Judiciary Committee since then with no timeline on when the committee might take it up.
Craig Johnson, executive director of the Streamlined Sales Tax Governing Board, said that based on the strong bipartisan support that the MFA had in the Senate, and the conversations he has had with parties interested in the legislation, he thinks Congress recognizes that something needs to be done in the area of sales tax on remote seller transactions. And if Congress decided to move together the MFA and the Permanent Internet Tax Freedom Act (S. 31/H.R. 3086, which would make permanent the prohibition of taxing Internet access and prohibit multiple and discriminatory taxes on electronic commerce), it would really communicate to people that the MFA is not imposing a new tax, Johnson said.
“All it's [the MFA] really doing is giving states power to collect tax that is already owing,” Johnson said.
Another issue that might prove stormy in 2014 is the state tax treatment of cloud computing, said Stephen Kranz, partner at McDermott Will & Emery LLP in Washington, D.C.
Current sales tax provisions generally impose sales tax at the location of the customer. This is called a destination regime. But determining or accurately tracking a customer’s location can be difficult when cloud computing users are accessing services with mobile devices.
“The legislative destination regime that we have today doesn't work in a mobile environment,” Kranz said. For example, if a person makes a cloud purchase remotely in Denver, but the billing address that the cloud provider has for the purchaser is in Washington, D.C., the District may collect the tax on the purchase even if that's not what the law says should happen, Kranz said.
“The only way to get there is federal legislation,” Kranz said. That federal legislation is pending in Congress and is known as the Digital Goods and Services Tax Fairness Act (S. 1364/H.R. 3724). It prohibits a state from imposing tax on sales of digital goods and services unless the customer's tax address is located in that state.
An old “new” issue that will continue to play out in 2014 is the state tax treatment of services.
Finding new ways to tax services will come up again in state legislatures like it did in 2013, said Loren Chumley, principal with the state and local tax practice at KPMG in Nashville. Among the states that considered expanding the sales tax base on services in 2013 were Louisiana, Ohio, Minnesota and North Carolina, but only in North Carolina did a limited sales tax base expansion occur.
“I think you’ll continue to see proposals filed,” Chumley said, about the 2014 state legislative session. Whether those provisions will actually pass though is a different story.
What do you think will be the big sales tax developments in 2014? Continue the conversation on Bloomberg BNA’s State Tax LinkedIn group.
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