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Proposed Sales Tax Legislation – Collecting Tax Out of State

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Proposed  Sales Tax Legislation – Collecting sales tax on sales outside your home state?

By Geoffrey Dancziger

Currently, if a business sells its products out of state, then that business is not responsible to collect sales tax provided that it has no connections or nexus in that state. The Federal Government is proposing tax legislation that may change the way businesses collect sales tax on out of state sales for mail order, internet and other “remote” sales.

The federal bill known as “The Marketplace Fairness Act of 2013” (“MFA”), which passed the Senate in early May 2013 provides a way for states to collect sales tax on out of state online, mail order or “remote” sales. At present, this bill is in the House of Representatives for consideration. Until this bill becomes law, individual states are unable to collect sales tax from out of state vendors that don’t have nexus i.e. physical presence in the State.

Why is this Bill being considered by Congress?

In 2012, it has been estimated that individual states are losing an estimated $23 billion in sales tax revenue, and with internet commerce growing, states stand to lose more revenue. Also, certain legislators believe that the brick and mortar businesses that are required to collect sales tax are at a competitive disadvantage to those businesses that don’t have to collect sales tax. This Bill will require all sellers who have remote sales exceeding $1,000,000 to collect sales tax.

Will this legislation become law?

Some legislators that are in favor of this Bill believe that out of state businesses should collect sales tax no differently than the brick and mortar businesses that operate in that State. Those against the Bill believe that it is a tax increase to those “remote” businesses and administratively those businesses will incur a high cost to comply with this proposed law. Either way, the legislators cannot ignore the amount of uncollected sales tax the states are losing without some type of Federal laws being enacted. Accordingly; many advisors believe that some form of tax legislation will be passed in the near future. Tax Partner Barry Sunshine believes that this bill has a good chance of passing but thinks the sales threshold of $1 million will be increased. Sunshine states “that many small businesses will incur significant administrative and compliance costs implementing the bill. For example, “many small businesses don’t have the in-house sales tax expertise nor personnel to comply with the Bill. These businesses will have to register, remit the tax and file sales tax returns as frequently as monthly for each state in which those businesses have sales”.

This legislation was shaped by a 1992 case Quill v. North Dakota. The Supreme Court ruled that a business must have a physical presence in a state for that state to require a business to collect sales taxes. However, the Court stated that Congress can overrule this decision through legislation. Under the Quill ruling, out-of-state retailers generally don’t have to collect sales tax.

Another major implication of the bill is with regard to digital downloads. Digital download sales are one of the most rapid growing businesses in today’s economy. As of this time, businesses that produce and sell digital downloads are not liable to collect sales tax in those states where they do not have nexus. Under the bill, states can require the collection of sales tax from those businesses to increase its tax collections.

In its current form, the bill must still pass the House to become law. However, it is likely to undergo changes before the House would pass this Bill. We want to keep our clients and friends informed on tax legislation that will affect their business. We will keep you posted.

If you have any questions regarding this legation, please contact either Geoffrey Dancziger or Barry Sunshine at 516-542-6300.

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