At first glance, Huffington Post coverage of Selena Gomez in a bikini and the Marketplace Fairness Act of 2013 seem unrelated, but the connection is more direct than one might think. If the bikini company that provided Ms. Gomez with her rocking swimwear is a multi-state online merchant that does not currently collect sales tax on all sales, the Marketplace Fairness Act could change that. Customers accustomed to not paying sales tax on certain purchases, and the companies not charging sales tax on those transactions, would both be impacted if MFA becomes law.
Luckily, the bill also calls for states to provide businesses free software from one of six certified providers to eliminate additional burdens caused by this legislation.
Here are 5 common misconceptions about online sales tax
#1. Small businesses don't need to worry about this bill.
In fact, businesses with less than $1 million in total gross remote sales in the preceding calendar year are not impacted by the MFA.
Whether you fall within the small seller exception or not, your company would still be required to collect sales tax in states where you collect now.
#2. This bill only applies to online retailers.
The bill applies to all "remote sellers." Remote sellers are defined in the bill as any entity (individual, corporation, LLC, and the like) that sells from one state into another and that does not currently collect sales tax. The sales method can be website, phone, or catalog.
If you run a California-based company that sells into other states, and only collect sales tax in California today, all of your sales into other states would be counted as "remote sales" under MFA. In addition, if your company has ownership interest in another company (as defined by the IRS), you might also be required to add their remote sales numbers to yours.
#3. If this bill becomes law, my company will immediately have to collect sales tax wherever I'm considered a remote seller.
Even if this bill becomes law tomorrow, some states will have to implement significant tax code simplifications in order to enforce it. Even then, states would not be allowed to implement the law earlier than 180 days following enactment.
Roughly half of the states with sales tax have already simplified their sales tax codes to the level required by MFA. The remaining states would need to pass laws to affect similar changes, including elements like a centralized sales tax administration and uniform rates, rules and boundaries.
#4. If MFA passes, my company won't have to worry about state-level statutes since those will all change anyway.
Even if MFA passes and you are under the small seller exemption, none of your existing collection obligations go away. Assuming your company already calculates, collects and remits sales tax correctly in every state, and many don't, passage of this legislation will add new compliance requirements to many companies.
Many states have already enacted laws that require certain out-of-state businesses to collect sales tax. These laws, typically called "Amazon laws," require more out-of-state businesses to collect sales tax, even if they lack a significant physical presence in that state. If MFA passes, and your business would be eligible for the small seller exemption under MFA, your company may have to comply with Amazon laws in states like Texas and California.
#5. There's nothing my business can do until the bill becomes law.
Long before legislators wrangled over which companies should collect and remit which taxes, sales tax has plagued companies of all sizes. With over 11,000 taxing jurisdictions throughout the U.S. and nearly 1,000 rate, boundary, and rule changes in January 2013 alone, getting sales tax calculations right is nearly impossible without help. In an era of doing more with less, companies are already outsourcing core functions ranging from accounting to payroll to legal. Outsourcing aspects of business compliance such as sales tax makes good business sense, regardless of what happens with MFA.
The Marketplace Fairness Act could dramatically change sales tax compliance requirements for small businesses that are not preparing today. Whether selling bikinis to starlets or skateboards to CEOs, the smart money is on businesses that prepare now, not later.