The proposed law aims to impose the same sales and use tax rules on online and out-of-state businesses that local vendors are now bound by.
The Marketplace Fairness Act of 2013 passed in the US. Senate in early May and expected to come up for a vote in the House of Representatives by the end of the summer, is likely to be a game-changer. If passed, the law would redraw the sales tax landscape and affect nearly every company, either directly or indirectly.
In a June 13 webcast, ‘The Marketplace Fairness Act: What Does It Mean For You?’, KPMG's Tax Governance Institute took an in-depth look at the legislation that would permit states to require online and other out-of-state vendors to collect sales tax on products and services they sell, regardless of whether they have a physical presence in the state where the customer lives.
The MFA’s central aim is to level the playing field for businesses. Out-of-state and online vendors should have to remit the same sales and use taxes as brick-and-mortar businesses, argue advocates of the law. Cash-strapped states are also eager for additional sources of revenue to refill their drained coffers. But in order to collect the tax from online and remote companies, states would be required to provide them with taxability and exemption information, as well as free software that would calculate transaction-level tax, file sales and use tax returns and be regularly updated to reflect rate changes.
While remote sellers with $1 million or less in annual remote sales would be exempt from the MFA. ‘the law casts a wide net,’ said Harley Duncan, managing director of the State and Local Tax Group of KPMG's Washington National Tax Practice, who moderated the panel discussion during the webcast. ‘There is a tendency for people to look at the MFA as an online sellers issue, but it effects everyone.’
For example, even though a business such as a pet grooming service may serve only local customers, if it buys items from an out-of-state wholesaler, it would need to ensure it provides an accurately completed resale certificate to its vendors for supplies that it sells to its customers. Otherwise tax could be charged twice – when the vendor sells the item to the pet grooming service and when the pet grooming service resells the same item to its customer.
What's at stake for companies? Potentially, the right to operate if they aren’t prepared to meet a variety of compliance challenges, including having to track business registration requirements in any tax jurisdiction where the company sells products, determine whether goods or services are properly classified as ‘taxable’ or ‘exempt,’ and monitor changes in state and local tax rates. For example, only a few states impose a sales tax on services broadly and states differ on the types of services they tax.
For the moment, it’s unclear to what extent a company’s ability to do business might be threatened if it failed to fulfill MFA requirements, said panelist Loren Chumley, KPMG's national practice leader for indirect taxes.
Another concern some companies have is once they register and begin to file sales tax returns whether some states may look into whether they owe income taxes, as well, said Chumley. Although the MFA is expected to apply only to sales and use taxes, ‘you will be on the [states’] radar,’ Meredith Garwood, Time Warner Cable’s vice president of tax, warned companies.
To prepare for the new business rules under the MFA, Garwood advised companies to first assess their jurisdictions because registration can be an arduous process depending on how many states they operate in. While in some states it’s possible to ‘walk’ a registration form through the process, in some cases it could take over a month, said Chumley. Online registrations are generally handled quickly, while paper registrations can average between 30 to 60 days to complete.
Companies also need to confirm whether their billing system captures elements the states will be looking for to be compliant, said Chumley. Checklist points also include determining any additional resources you will need to bring on board if the law is implemented.
Since currently the questions outnumber the answers, companies must be patient, said Richard Dobson, executive director of sales and excise tax with the Kentucky Revenue Cabinet, representing the Streamlined Sales Tax Governing Board on the panel. ‘Companies won't just flip the switch. Every company will have to transition,’ he said.