Answered: 5 E-Commerce Sales Tax Questions
There seems to be at least one thing that democrats and republicans agree on – all merchants should collect sales tax, regardless if they sell through a traditional brick-and-mortar store or exclusively online.
In fact, the e-commerce sales tax bill, known as the Marketplace Fairness Act, successfully made its way through the Senate with a bipartisan vote of 69-27 just a week ago, and is now awaiting a vote in the House of Representatives. And if this bill makes it to the President’s desk, gets signed and becomes law, most e-commerce merchants will need to collect sales tax from their customers in the near future.
Despite the rapid adoption of this bill, there are still many uncertainties surrounding the Marketplace Fairness Act. Website Magazine looks to answer some of the most common asked questions about e-commerce sales tax:
1. What is the current state of e-commerce sales tax?
Currently, online retailers are required to collect sales tax from customers in their own state. In addition, Nexus, which is defined as having a significant physical presence in a state, determines whether an online retailer is also required to collect sales tax from out-of-state customers. For example, online retailers must collect sales tax from out-of-state customers if the retailer has a physical presence within that customer’s state, which includes a temporary or permanent presence of property or people working in that state.
2. What is the Marketplace Fairness Act?
According to marketplacefairness.org, this bill would grant states the authority to require online and catalog retailers, otherwise known as remote sellers, to collect local sales tax at the time of transaction. However, it is important to note that this bill actually aims to simplify the state tax codes to make compliance easier for retailers, which is the result of two previous Supreme Court rulings that cite collecting sales tax for multiple states is too difficult.
This is why the bill requires states to simplify their tax laws in order to make multistate sales tax collection easier. This can be done by either voluntarily adopting measures of the Streamlined Sales and Use Tax Agreement (SSUTA), which aims at making sales tax collection simple and has already been adopted by 24 states, or by meeting the five simplification mandates within the Marketplace Fairness Act. These mandates include: notifying retailers in advance of any rate changes within the state; designating a single-state organization to handle sales tax registrations, filings and audits; establishing a uniform sales tax base for use throughout the state; using destination sourcing to determine sales tax rates for out-of-state purchases; and lastly, providing free software to retailers for managing sales tax compliance.
3. What is the Small Seller Exception?
The Small Seller Exception essentially exempts retailers who made less than $1 million of total remote sales in the United States within the preceding calendar year from tax collection requirements.
4. How long until the bill is enforced?
Since the bill hasn’t passed the House or been signed by the President yet, there is no firm date set in place. However, if it is passed, the bill could go into full effect before the end of the year.
According to marketplacefairness.org, “Online retailers who do not qualify for the Small Seller Exception will be required to collect sales tax starting the first day of the calendar quarter that is at least 90 days after the date of enactment of the Marketplace Fairness Act.” This date, which could be as early as Oct. 1, 2013, will require sales tax collection for all sales shipped to the 22 states that are full members of the Streamlined Sales and Use Tax Agreement (SSUTA).
As for the remaining states, the website notes that if they implement the provisions of the SSUTA, they will receive collection authority on the first day of the calendar quarter that is at least 90 days after achieving full member status. Conversely, states that implement the simplification requirements of the Marketplace Fairness Act will receive collection authority six months after the date of enactment, which will be no earlier than the first day of the following calendar quarter.
5. How do merchants comply?
As previously stated, if the Marketplace Fairness Act passes, states will be required to provide free software to retailers for managing sales tax compliance.
That said, managing sales tax collection has already been accounted for in the SSUTA. In fact, the SSUTA Governing Board oversees a certification process that includes the testing and verification of software and services to ensure compliance not only with the SSUTA, but also with other applicable state and local laws related to sales tax. Currently, there are six certified service provider platforms available to help retailers achieve compliance, including Enterprise TaxTools by Accurate Tax, AvaTax by Avalara, SpeedTax by CCH, Exactor by Exactor, TaxCloud by FedTax and TaxWare by TaxWare. It is important to note that out of these services, TaxCloud is currently the only free certified option for retailers, as state commissions pay the company when it transfers sales tax funds from the retailer to the state.