There is a current piece of legislation that has a lot of business owners very concerned about their future tax liabilities. The legislation, called the Marketplace Fairness Act (MFA), would require that state sales tax be collected on any internet purchase made by an individual in a sales tax collecting state. Currently, MN residents that make purchases on Amazon are not charged sales tax, but if the MFA passes sales tax will be added. States that do not have a sales tax, such as Montana, will not be affected. Congress is due to vote on the Marketplace Fairness Act of 2013 next week.
Supporters of the MFA have asserted that it will be highly beneficial to brick and mortar stores that have been previously disadvantaged by internet sales being exempt from collecting sales tax and will increase competition. The supporters have also argued that this act will allow states to better enforce compliance of use tax laws that require individuals to pay a use tax on purchases that did not collect sales tax (ie internet sales) above a threshold.
Dissenters of the MFA have claimed that it will create an undue hardship on businesses trying to comply, and that business collecting tax for states where they do not have a physical presence, will not even get to benefit from the tax collected. This last issue would affect the states without a sales tax the most because they won't bring in sales tax from other states, but they would be required to collect for those other states.
To reduce the hardship on businesses, the MFA would only require that businesses that have internet sales of $1 million or more be required to comply. The act also requires all states to simplify their sales tax laws. States will have two simplification options available to them.
Option 1: States have the option to adopt the Streamlined Sales and Use Tax Agreement which has been in the process of development over the last 11 years and in which 24 states, including Minnesota, have already adopted. This agreement requires uniform tax definitions, rate simplification, state- level administration of all sales taxes, uniform sourcing, uniform and simpler exemption administration and state funding of the administrative cost.
Option 2: States can agree to meet five simplification mandates listed in the act.
- Notify retailers in advance of any rate changes
- Designate a single state organization to handle sales tax registrations, filings, and audits
- Establish a uniform sales tax base for use throughout the state
- Use destination sourcing to determine sales tax rates for out-of-state purchases (a purchase made by a consumer in California from a retailer in Ohio is taxed at the California rate, and the sales tax collected is remitted to California to fund projects and services there)
- Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data
The Senate is expected to pass this bill within a week and then it will be sent to the House for further deliberation. If passed business could be expected to comply as early as October 1st of this year. For further questions on how this could affect your business or on compliance, feel free to contact us. For more information, please visit the Marketplace Fairness Act's official website.
