Whether to levy or not to levy State Sales Tax on online sales has been in the talks for quite some time now. For instance in 2013, there was the famous Amazon and Overstock v/s the State of New York (NY) case regarding the “Amazon laws” (Read: Sales Tax for Internet Based Online Sales) where big online retailers, such as Overstock and Amazon were against the collection and remitting of sales tax to the government of certain U.S. states where their items were sold. States such as Colorado and NY felt it necessary to push for fairness between physically present stores (bricks and mortar shops) and virtual stores (online). However, the proposed Remote Transactions Parity Act of 2015 (aka: Marketplace Fairness Act (MFA) of 2015) is quite different from the one of 2013. 2015’s MFA proposes to allow states to decide themselves upon taxing the online/remote retailers instead of having a unanimous law passed in Congress.
Rep. Jason Chaffetz, R-Utah is currently working along with a bipartisan group of lawmakers on streamlining the taxation procedure to make it simpler for states and local authorities to collect taxes on remote (online) sales transactions. This proposed remote sales tax legislation would also impact Canadian online retailers catering to U.S. customers, making it all the more crucial for them to review their tax plan, and strategize their tax compliance and reporting accordingly to reduce the potentially severe impact of these state taxes on their business. AG Tax analysts have prepared a brief overview of this proposed legislation, which should be highly informative for online business owners both in the United States and Canada. Please note that this article is only for general information and does not replace professional advice.
Proposed Remote Transactions Parity Act (RTPA) of 2015
The Remote Transactions Parity Act of 2015 allows states, such as: Ohio, New Jersey, etc. which are members of the streamlined sales and use tax agreement to collect taxes from online-based/remote retailers making sales in these states without any physically present store in the concerned state; non-member states would need to adopt measures like destination-based sourcing to be able to tax online sellers.
However, initially only the states which meet the conditions outlined in the Streamlined Sales Tax Program will be able to collect taxes from “online-based/remote sellers” selling products to buyers within the state, and slowly move on to cover other online-based businesses.
That being said, on execution of the bill, businesses making $10 million in total sales will need to collect the state sales tax (SST) from their buyers while for the following years, the total sales threshold required for collecting the SST would be: $5 million in 2nd year, and $1 million in 3rd year, and so on.
Small businesses and exempt organizations making less than $5 million in gross sales (as per state audits) could expect a lesser burden as significant measures have been taken to protect them from the SST in the first year.
The RTPA of 2015, further requires states to make sales tax boundaries and taxability information available to sellers. The member states must hire “Certified Service Providers”, whose services should be available for free to these online/remote sellers.
These services include:
- Determination of accurate sales and use tax based on the sourcing rules
- Calculation of the sales and use tax applicable at the time of sale
- Electronically file sales and use tax returns and generate receipt
- Electronically pay the sales and use taxes to the respective state authority
- Report all processed transactions to the remote seller, and respond to any audit requests
- Safeguard and protect consumer information available to them while performing these responsibilities
Issues with RTPA, 2015 & Suggested Alternative
It is expected that the RTPA would increase compliance cost for companies, which could be a concern for small online retailers, but a competitive advantage for online giants, such as: Amazon, Ebay, and others.
Some experts believe that an origin-based plan, in which a seller calculates the SST based on the tax rate of the state where the primary place of business/head office is located and remits it to the concerned tax authority irrespective of the state in which the sale has been made, would be a better approach, and could help prevent aggravated compliance costs.
The ‘origin-based plan’ was first highlighted in House Judiciary Committee Chairman Bob Goodlatte (R-Va.) draft legislation as ‘hybrid origin-based plan’, wherein a seller applied the sales tax rate of the state in which the head office is situated to remote purchases, and then remit the tax to the seller’s and buyer’s home state. The states participate in a fund reimbursement program channel the revenue created based on the seller’s tax rates and rules back to the buyer’s home taxing authority. Thus, avoiding the high compliance costs of the MFA and RTPA and preserving the beneficial tax competition. However, a drawback of this plan is that it does not allow the states with no sales tax to decline from participating in this program.
As the tax is levied in the state where the main office is located, it prevents chaos, and also makes it fair to physically existing stores.
National Retail Federation Senior Vice President for Government Relations David French believes that this bill will eliminate the online sales tax collection loophole, which provided online sellers an advantage over physically existing stores, and thus hampers fair competition. This bill also provides states with the privilege to audit any doubtful remote/online seller suspected of misrepresentation of data.
Conclusion
While the chances of these bills becoming law are unknown, it is recommended that online business owners be prepared. With the global economy and rapidly growing number of online businesses avoiding taxes, the governments must find new ways of generating revenue. Online businesses should consult their tax professionals regarding any changes in tax laws, and how these changes may impact their business once passed. Failure to keep up to date with changes in tax laws can create unnecessary tax burden and hardship.
AG Tax LLP Can Help
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
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We can assist with:
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