By Ned A. Lenhart, MBA CPA
It was just a matter of time before the U.S. Congress would take up the initiative of giving states the ability to compel remote sellers, with the force of state law, to collect sales tax on all sales that originate in one state but are delivered to another state unless such sales are exempt from tax in the destination state. The current House Bill is H.R. 2193 and is named ‘Remote Transactions Parity Act of 2017. This bill is virtually identical to the previous two versions that were introduced in 2013 and 2015. The Senate has also reintroduced a bill that is likely similar to S. 698 that was introduced in 2015.
These bills have many similarities but also significant differences. Both measures leverage the efforts made by the Streamlined Sales Tax Project (SSTP) that were put into place in 2002. The entire purpose of the SSTP was to demonstrate to Congress that the states were serious about streamlining the sales tax compliance process for out-of-state businesses. There are about 25 full and affiliate members of the SSTP. Some states that once belonged to the SSTP have dropped their membership because many of the SSTP provisions are unworkable.
Both measures are clear in their goal of giving states that conform to the SSTP provisions the ability to compel remote sellers to collect and remit sales tax on sales made to taxable customers in the taxing state. Both measures specify that the laws, if passed, would not preempt or limit any power that the states may currently have for collecting from remote sellers so long as those powers are valid under state or federal law.
The biggest difference in the bills is found in the ‘small business exemption’ that each measure provides. The House Bill provides a three year phase in of the bill for remote sellers that do not sell as part of an ‘electronic marketplace’. In year 1, sellers with less than $10 million of sales are exempt from sales tax on remote sales, (unless they otherwise have a physical presence in the state). In year 2, sellers with less than $5 million of sales are exempt from sales tax on remote sales (unless they otherwise have a physical presence in the state). In year 3, sellers with less than $1 million of sales are exempt from sales tax on remote sales (unless they otherwise have a physical presence in the state). In year 4 and beyond, there is no exemption for any business-regardless of the size-from being required to collect sales tax on taxable sales. I believe this phase in approach is unfair to the new businesses that enter the remote sales market at any time after ‘year 3’. The phased in approach clearly favors experienced businesses that have some time to implement the sale tax processes.
Sellers that are part of an ‘electronic marketplace’ (Amazon, e-Bay, Etsy, etc.) are not given any protection from having to collect sales tax regardless of the size of the business. Sellers that are part of an ‘electronic marketplace’ must collect on the first dollar of sales made to states that adopt the SSTP. The electronic marketplace is defined as a digital marketing platform where products are offered for sale by more than one remote seller and buyers may purchase such products or services through a common system of financial transaction processing.
The Senate measure does not have a phased in small business exemption. Rather, it has a permanent $1 million small business exemption. The Senate measure does not have a provision regarding the ‘electronic marketplace’. As such, remote sellers that sell through Amazon FBA would only need to collect tax in states where they have nexus. Amazon FBA sellers with over $ 1 million in sales would be required to collect tax in all states where they have sales.
Like many other pieces of federal legislation, this issue is as politically charged and the lobbying efforts are intense on the part of the main street retailers and the state governors (in favor of passage) and the Direct Marketing Association (in opposition) of passage. This is not a new issue. Legislation like this has been introduced from time to time for the past 30 years. With Amazon collecting tax in all of the states, proponents could use that fact as a success story to convince Congress that the tax challenges that once existed are no longer there. Amazon may even attempt to ‘level the playing field’ and could be a huge proponent of the bill since it is now incurring the cost of compliance and may want to force other retailers to begin collecting. In the past, Senator Mitch McConnell has opposed to this legislation, which meant that the Senate bill might not pass.
Despite these past challenges, the news that the state revenue gap is growing and that the states are taking preemptive steps to force the Supreme Court to reverse its 1992 decision requiring a physical connection in the state by the retailer before the state can force the retailer to collect tax. Congress may take another ‘wait and see’ approach or it might force this action to a vote. Only time will tell.