The Marketplace Fairness Act (Internet Tax) - Impact on Manufacturers, Distributors & Wholesalers
Executive Summary:Remote sellers under the Marketplace Fairness Act (MFA) most visibly include online retailers and catalog sellers. However, the MFA will also impact the vendors/manufacturers/distributors who sell to these retailers as well, regardless if the manufacturers sell direct to consumers. The MFA will impact a much larger group of companies than previously thought and across all industries. Manufacturers and wholesalers have always dealt with their own state where they have nexus, MFA will expand this dramatically. These negative effects will be felt through virtually all areas of the economy.
Massive Impacts include: • Sales tax audits from up to 46 states in any year – Even if you have no presence in the state and do not sell direct to consumers. • Substantial initial compliance costs including IT upgrades and integration issues, personnel commitment and capital expenses • Significant ongoing expenses for service contacts, personnel costs and other compliance costs Background: The Marketplace Fairness Act (MFA) bill passed in the Senate and is commonly referred to as the Internet tax bill. The bill is currently in the House of Representatives, in the Judiciary committee under consideration. The bill would allow states to require remote sellers to collect sales tax on their behalf even if the company doesn’t have a presence in the state (called nexus). This law would overturn all previous precedent which was confirmed in the 1992 Supreme Court’s Quill decision regarding a catalog company selling to North Dakota businesses.
Why does it affect you? The MFA bill concerns “remote sellers”. Remote sales don’t just mean Internet sales, but includes any sales across state lines. Other examples include catalog orders, phone orders, and sales to retailer customers for resale. The relevant sections of the MFA bill and SSUTA agreement:
S.743 or the MFA states in section 2 requires all sellers not qualifying for the small seller exemption to collect and remit sales and use taxes per the provisions of the Streamlines Sales and Use Tax Agreement (SSUTA).
In the most recent version of the SSUTA amended 5/12/12 a seller is defined on page 10, line 25: "A person making sales, leases or rental of personal property or service"
Section 317 - Administration of Exemptions (such as wholesalers/vendors/manufacturers selling to retailers) Line 17 - "The seller shall maintain proper records of exempt transactions and provide them to a member state when requested."
The above line clearly shows that the wholesalers retailers purchase from are certainly considered sellers.
And really, this isn't surprising. Current sales tax rules do require exemption certificates to be filled out for a state that you'd have sales tax responsibility for (your home locations(s)). There is an exemption certificate for the SSUTA for states to use. MFA changes the game for the number of states suddenly involved.
How does the law affect manufacturers, distributors & wholesalers? It depends if you also sell retail to remote consumers.
Scenario 1: Manufacturer/wholesaler sells to retailers and sells direct to Consumers. – Full brunt of MFA applies.
These companies will be impacted exactly the same as any other retailer under the MFA. They will suddenly have the same compliance and audit burdens as any other retailer would, with all the states. Before the MFA, the manufacturers only had to worry about states they had nexus in for collection of sales taxes to end users and managing exemption forms for their wholesale retail customers that are in the same state(s).
Some of the Sales Tax Compliance Headaches Ahead – Hard Costs • Extensive initial commitments of personnel time • Installation/configuration of tax computation software or service -IF your various touch points are supported by the vendor. • Possible Software upgrades • Initial fixed expense and annual yearly expenses to collect and remit tax for up to 46 states • Submitting monthly reports and collections to up to 46 states • “Free software by the states” – A myth. All states can pick their own and it won’t work with your systems. 45 different versions certainly won’t. So you’ll have to sign up with a paid service
Some of the Sales Tax Compliance Headaches Ahead • Audits from up to 46 states – Even if you have no physical presence or representation • Up to 46 audits in any given year. Even 1 state every 10 years is almost 5 per year, every year! • New Compliance Demands – Exemption certificates better be on file! You will be audited. • State tax board communications – The burden of responding to all state inquires is substantial when multiplied 4500%.
Scenario 2: Manufacturer/wholesaler doesn't sell direct in any way to consumers, only retailers. Audit risk jumps up to 4500% - Audits from 46 states.
True-wholesale companies that only sell to retailers will also be impacted by the MFA. They are still sellers. As it is now, these manufacturers already do report to their home state's sales tax board, but they would require exemption certificates to be on file from their retailers, certifying the product was for resale and that sales tax did not need to be collected. Their home state can audit them and probably does from time to time. Under MFA, these manufacturers would now be subject to the same audit risks as retailers. The manufacturers are still sellers of products to these states and will need to prove, on demand or audit, that their sales are properly exempt sales. So even manufacturers who don't sell at retail to end consumers, will need to respond to and can be audited by all other states to ensure transactions are properly exempt.
Some of the Sales Tax Compliance Headaches Ahead • Audits from up to 46 states – Even if you have no physical presence or representation • Up to 46 audits in any given year. Even 1 state every 10 years is almost 5 per year, every year! • New Compliance Demands – Exemption certificates better be on file! You will be audited. • State tax board communications – The burden of responding to all state inquires is substantial when multiplied 4500%.
Recommended Actions – Take Action Now! Let them know how this will harm your business
• Join the eMainStreet Alliance Today! There are no fees or dues of any kind. • Contact the House Representative for your business http://www.house.gov/representatives/find/ • Contact your personal Representative (if a different district) • Contact the members of the House judiciary committee http://judiciary.house.gov/about/members.html • Contact your state’s governor (major supporters of MFA) • Contact your local chamber of commerce (also supporters of MFA) • Contact your state’s chamber of commerce • Work with other trade groups or associations in your industry • Let others know! Sound the alarm! • Contact local and regional media
Update 7/31/13: Streamlined Tax Governing Board March 18th 2013 Notes Confirm – Taxable and Nontaxable count towards small seller exemption. Wholesalers, distributors and manufacturers will ALSO be affected, even if they don’t sell direct to consumers and don’t collect sales tax. Certainly a drag on all sectors of the retail economy if implemented:
Notes regarding their Federal Implementation Workgroup Call from March 2013: They specifically talk about if non-taxable counts towards remote sales for the small seller exemption, and they concur they do.
“MFASection 2(c) –Updates Small Seller Exception Threshold There were questions received after the last implementation meeting regarding whether non‐taxable sales are included in determining the threshold. Mr.Jennrich said generally it appears that it would include both taxable and non‐taxable sales based on the language, a reading consistent with discussions at the prior Implementation Workgroup meeting”