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Online sales tax law changes the sales tax situation

Posted on January 16, 2013 by Erin Granville

Right now, online retailers only have to collect sales tax for states where they have a physical presence. But many expect Congress to change that.

In the previous session of Congress, which ended on January 3, three bills were introduced to give states the authority to require online retailers to collect sales tax, no matter where the business is located. All three expired with the end of the congressional session, but the most popular—the Marketplace Fairness Act—is expected to be reintroduced early this year.

So what can we expect from online sales tax legislation this year?

Any new legislation is likely to include the provisions that all three previous bills included:

  • States that meet certain conditions will have the authority to require out-of-state retailers to collect sales tax
  • States must simplify their sales tax laws before they are granted that authority
  • Small out-of-state businesses will be exempt from collecting sales tax, so that they are protected from any requirements that could be a burden

What we don’t yet know is how new legislation will address the two areas where the old bills disagreed: how states can meet the simplification requirements and how to define “small business.”

Meeting the Simplification Requirements

It’s a near-certainty that states will have to simplify their sales tax laws if they want to require out-of-state retailers to collect sales tax. What remains to be seen is how an online sales tax law will allow states to meet those simplification requirements.

Two ways have been proposed in previous bills. One is simply to list simplification measures in the bill itself and require states to make sure their laws include those simplifications before they can receive collection authority.

Another option requires states to adopt the Streamlined Sales and Use Tax Agreement (SSUTA), a set of guidelines created by states and the business community to make it easier for retailers to collect sales tax for multiple states. It focuses on simplifying and standardizing sales tax rules—so that, for instance, a Snickers bar isn’t taxed as candy in one state and as food in another. The SSUTA rules tend to be more in-depth than the bills’ simplification measures.

The Marketplace Fairness Act actually allowed states to use either method to simplify their sales tax laws, so that’s a possibility for future legislation as well. And the twenty-four states that have already joined SSUTA will probably be among the first to receive collection authority in any case, since they will have already simplified their sales tax laws as the legislation is likely to require.

The Small Seller Exemption

Everyone agrees that small businesses should not be required to collect out-of-state sales tax. Where everyone seems to disagree is what qualifies a business as “small.”

Here’s how the three previous bills set the definition of “small seller”:

  • The Marketplace Fairness Act: Businesses with less than $500,000 in annual remote (out-of-state) sales are exempt from collecting out-of-state sales tax.
  • The Main Street Fairness Act: The Streamlined Sales Tax Governing Board (the administrative arm of SSUTA) determines the “small seller” threshold, currently pegged at $500,000 in annual remote sales.
  • The Marketplace Equity Act: Sellers with less than $1 million in annual remote sales are exempt from collecting out-of-state sales tax. In addition, businesses are exempt from collecting for a particular state if their annual sales to that state are less than $100,000.

If the Marketplace Fairness Act is reintroduced, as most expect, its exemption level of $500,000 could remain intact. However, it’s impossible to know for sure until the new legislation is introduced this year.

It’s important to remember that no online sales tax bill creates a new tax or raises taxes (since sales tax is already due on online purchases). They do, however, create new responsibilities for some businesses. In the next post in this series, we’ll look at what online sales tax would mean for these businesses. And if you missed last week’s sales tax post, make sure to check out Why don’t online retailers collect sales tax?

About the Author

Erin Granville is Communications Editor at FedTax, the proud creator of TaxCloud.
TaxCloud is a free, easy-to-use sales tax management service for retailers. It handles every aspect of sales tax, from calculation to collection to filing—all at no cost for retailers.

TaxCloud can be easily integrated into most accounting, order management, and shopping cart systems. It has been evaluated by states and an independent review board and has been designated one of only six Certified Service Providers in the nation.

Check out the Spree TaxCloud extension written by Spree Community member Jerrold Thompson to integrate TaxCloud with your Spree store.