Sales taxes are well understood by most everyone. Use taxes are fairly simple in conception as well: they’re taxes levied on transactions that would be assessed when buyers and sellers live in the same state.
In terms of use taxes, the internet complicates matters.
Senate Bill 336 is the proposed “Marketplace Fairness Act” (MFA). It’s the federal legislation to deal specifically with the question of what to do about sales and use taxes. Introduced in Feb. 2013, the Marketplace Fairness Act is summarized by Congress.gov as follows:
“Marketplace Fairness Act of 2013 - Authorizes each member state under the Streamlined Sales and Use Tax Agreement (the multistate agreement for the administration and collection of sales and use taxes adopted on November 12, 2002) to require all sellers not qualifying for a small-seller exception (applicable to sellers with annual gross receipts in total U.S. remote sales not exceeding $1 million) to collect and remit sales and use taxes with respect to remote sales under provisions of the Agreement, but only if such Agreement includes minimum simplification requirements relating to the administration of the tax, audits, and streamlined filing. Defines "remote sale" as a sale of goods or services into a state in which the seller would not legally be required to pay, collect, or remit state or local sales and use taxes unless provided by this Act.”
Got that?
Let’s put it in layman’s terms. For this example, assume that you are the proud owner of a widget store in Tennessee, and you also sell your widgets online. When you sell widgets to customers in your physical store in Tennessee, you collect the local sales tax at the time of purchase. When you sell a widget to an online customer who lives in say, Kansas, you are not required to collect the sales tax because you don’t have a physical store in Kansas.
However, this will change if the MFA is signed into law. The MFA proposes that when you sell your widgets to a customer who resides in a state where you don’t have a physical location, you will be required to collect the sales tax at their local tax rate. If you don’t collect the sales tax, the customer is then required to remit the sales tax to their state. As you can imagine, this scenario rarely happens.
Now, if your widget store makes an online purchase of a good or service, the company is required to remit the tax to their home state and many businesses indeed comply. Why? Because the risk of an audit and substantial penalties is too great for some businesses to bear.
As you can imagine, one of the main drivers of the MFA is to enhance consumer compliance. But it’s also easy to see how difficult it could be to manage the administrative burden that an online retailer will have to take on in order to keep up with every state’s sales tax rate, their specific taxable items, tax holidays, etc. as well as being required to file a tax return in each state where you sold your product.
There are mixed opinions about the legislation. Some consider it as a government grab while others say it’s only, well, marketplace fairness. The fate of the Marketplace Fairness Act is not yet known, as it’s still under discussion in Washington. Meanwhile, states are individually taking steps to see that they capture revenue they see as otherwise escaping from their coffers.
Talk to an accounting professional to make sure you’re doing what’s required – as either a buyer or seller online.
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