The Internet Sales Tax Resurfaces — and All May Not Be Smooth Sailing for Middle-Market Firms

It’s a spat that goes back decades and was stirring passions on both sides even before the rise of the Internet. Brick-and-mortar retailers say that their obligation to collect state sales taxes puts them at a competitive disadvantage. Customers can window-shop in their stores, then buy the same item from a mail order or online retailer at less cost, in part because a sales tax doesn’t apply.

According to a 1992 Supreme Court ruling, state and local sales taxes apply to mail-order and online sales, but mail-order retailers don’t have to charge the tax if they don’t have a physical presence in a state. (The responsibility for paying the tax falls on the consumer, who almost never actually pays it.)

Earlier this year, the Senate passed the Marketplace Fairness Act, which is intended to level the playing field for retailers. However, this past September, the measure got stuck in the House Judiciary Committee, where chairman Bob Goodlatte (R-Va.) released a list of seven principles that he and others would like the Internet tax bill to meet.

Middle-Market Executive recently caught up with Susan Haffield, a partner with PwC’s state and local tax practice, and asked not only about Goodlatte’s seven principles, but also about what middle-market businesses may want to be thinking about if the bill wiggles through the House.

MME: When it comes to these so-called guiding principles, what is the House Judiciary Committee trying to reveal?

Haffield: Well, for example, “No regulation without representation” was a guiding principle. What this is getting at it that the Senate version of the bill doesn’t allow any path to litigation if you disagree with something that a state does. For example, a state is required to have a single place where you file returns, so instead of, say, having to file a return with the city of Denver as well as the state of Colorado, you file one return with the state. So if Colorado were to try to enforce its collection and then they still force businesses to file two returns, they are in violation of the law and there is really no way to sue Colorado in the federal bill. So he’s saying that there are still a lot of things within the Senate bill that we need to fix, and here’s my guiding principle. In my mind, this is where things at the moment have stalled — or at least there is nothing more that has been made public. This is the farthest that this bill has ever gone, but it’s sitting in the House and there is an expectation that the House will rewrite it and have a House version.

MME: Why should this bill be of greater concern to middle-market companies than, say, to large enterprise firms?

Haffield: The reason, I think, that this impacts middle-market business much more so than the larger businesses is that most larger businesses already know how to collect sales taxes. Now, brick-and-mortar stores have already had to develop sales tax systems — they already have sales tax systems in place and infrastructure. What’s clear is that any business today really needs at least some online presence, and the way the Senate bill works is that if you have at least a $1 million of your stuff being sold anywhere in the U.S., you are subject to the bill and now you have to collect tax everywhere. For a market-market business, a million dollars really is not very much.

MME: So if you’re a $20 million business and only 5 percent of your business is online, that 5 percent is going to cost you …

Haffield: I had read a statistic that if they raised the threshold to $15 million, the states would still be able get about 90 percent of the expected revenue estimate. The small business exception seems to many business owners pretty low at $1 million. At the same time, I think that a lot of the implementation costs get lost in the debate over this issue.

MME: Are there steps that you would recommend that middle-market businesses take in response to the direction in which things are moving?

Haffield: I do think that it’s only a matter of time before we’ll see something happen with this legislation. While I can’t speculate, all indications seem to be that something is about to happen. It’s kind of like federal tax reform, where there’s a similar sense. The preparation that I would recommend for middle-market businesses that are currently making sales into multiple states but are filing sales tax returns in only a few is to assess what the impact would be of collecting sales tax in those states.

MME: You begin by asking, “Are my sales taxable in those states?”

Haffield: Right. You could have a business that sells to other businesses, and maybe those businesses have an exemption when the seller doesn’t have nexus — so they don’t really have to worry about any compliance at all. But if now all of sudden they are subject to tax collection even for exempt sales, they need to start gathering documentation from their customers. Let’s just say that you have a business that sells parts and they don’t have nexus in Michigan. They would have to start gathering exemption certificate documentation from all of their Michigan customers to prove that they did not have to collect tax on those sales. Now let’s take a business that sells parts, but those parts would be taxable in the state of Iowa … that same business, when it is getting exemption documentation from the state of Michigan, it would have to decide, if the bill was to go through, would it have to collect tax on business in Iowa? How many customers does it have? How big is that number? This is really about getting a readiness assessment: “What am I selling that is taxable and where am I not collecting tax?” This would at least allow businesses to know whether this could be a big deal for them. If they are making sales in only 10 states and they are already collecting in five, then the universe is really about the other five.