If you’re in the online retail business, you know. Or you should know.
The Internet Sales Tax, more officially known as the Marketplace Fairness Act of 2013 (MFA 2013), is well on its way to becoming codified and standardized: on May 6th of this year, the Senate passed the bill.
Now, as MFA 2013 makes its way through the House of Representatives, it’s important to remember the key points covered in the bill:
It would give states the authority to obligate “remote sellers” to collect sales tax in the states where transactions occur.
MFA 2013 would apply to retailers with aggregate annual remote sales of at least $1m.
To clarify, remote sales are transactions that take place over the internet, via phone, catalog, fax, etc. Remote sellers are vendors who sell via the aforementioned mediums.
MFA 2013 applies to all remote sales and remote sellers. It is an effort by the federal government to give states more legal power to enforce sales tax collection.
Normally, retailers collect sales taxes on behalf of the state in which they have nexus, the legal connection that a state has with a business that obligates the business to collect tax for that state. Historically, nexus was triggered by doing business in the state.
But with the rise of ecommerce, the original location-based trigger became irrelevant. As a result, through legislation like the “Amazon laws” of New York, nexus has been redefined to include concepts like ‘click-through-nexus,’ where an web ad placed on a webpage hosted on a server within state borders determined which state got sales tax.
MFA 2013’s trickle-down effects for online retailers
Under current laws, if you’re a vendor who is based in California and you sell to someone in New York, you wouldn’t be obligated to collect sales tax for New York because you don’t have ‘nexus’ in New York.
Instead, state sales tax on online purchases kicks in when the consumer records their online purchases on their tax return. But more often than not, consumers forget to record such transactions or neglect to do so, resulting in a nearly $11bn loss in tax revenue for the states.
If MFA 2013 is passed, the state sales tax to be collected would be based on the customer’s location. Circling back to the previous example, under MFA 2013, you, the online vendor, would be obligated to collect sales tax for New York.
What about the compliance threshold of $1m in remote sales?
If you’re an online retailer who made at least $1m annually in online sales in the US, then under MFA 2013, you would need to collect sales tax for each sale on behalf of the state that each transaction occurred in. In each sale, the state for which you collect sales tax for is based on the customer’s side of the transaction.
If you made under $1m in online sales on an annual basis, you’d be exempt from MFA 2013 under the small business threshold. However, nexus would be used to determine sales tax collections for these exempt retailers instead.
Online retailers under the small business threshold would have to navigate nexus on a state-by-state basis and as the concept of nexus has been modified to keep up with the increasingly location-agnostic nature of transactions, it could be quite tricky to figure out which state’s laws to comply with.
Which steps should I take to protect myself?
Even with a potential crackdown on internet sales tax collections, as an e-retailer, there are steps you can take to insulate yourself from the brunt of the crackdown.
First off, if MFA 2013 does come to pass, make sure you comply with the sales tax laws you’re subject to: with revenue-hungry state governments, you can be sure to expect a strict compliance environment.
Do your research and prepare to take the operational impact of more complex sales tax compliance. Lastly, make sure you aren’t losing out on profits with your product pricing – with a potentially more complex tax environment, you can expect margins to contract due to increased price competition and heavier consumer scrutiny.
The biggest questions remain:
- What will the US online retailers do to protect their margins if MFA 2013 comes to pass?
- Will the European retailers will see this as opportunity in the US market ?
- How will that affect the retailer’s pricing strategy to make sure they are ready to handle intense competition?