During the last session of Congress there were three separate federal bills under consideration for the issue of on-line sales tax. The bills would grant authority to states to require Internet (remote) sellers to collect state and local taxes. Those bills all expired but it appears likely that legislation will be submitted for the new session. Obviously we can’t know exactly what provisions any of them will contain or if any will actually be signed into law, but some general assumptions can be made. It’s clear that states will be required to adhere to certain rules in order to be granted the required authority. There will be some kind of “small business” exception. In theory, states will be motivated to qualify and sellers will not. States want the additional revenue and sellers don’t want the additional red tape that comes with collecting and remitting sales tax. Nor do remote sellers wish to lose the tax advantage they currently enjoy over brick and mortar companies.
Given the likely objections sellers will raise against these sales tax rules, I started to think about what they might do to minimize (I would say “avoid” but that has very a negative connotation in the sale tax world) their chances of being pulled into this net of mandatory Internet taxation and mitigate their responsibilities if they are.
The easiest way to stay below the radar is to fall underneath the “small business” threshold (in some cases $500K annual revenue, in others $1 million annual revenue). Each of last year’s bills used nationwide revenue as the basis for measuring companies, though they differed on the actual threshold. “Nationwide revenue” sounds like something to be gleaned from Federal income tax returns. It was my experience as a state auditor that the IRS wanted access to state tax returns immediately, but flow of information in the opposite direction was almost non-existent. Maybe it will be different since these bills originate at the federal level, but maybe it won’t. Either way, this will be one more incentive for companies to be creative when completing federal income tax returns.
A scarier scenario for these remote sellers would be if authorized states had to make this determination themselves. In practice that means a seller in Maine could be visited by auditors from all these state simply to prove to them that sales are below the threshold; and this could occur annually. Of course, this begs the question of where those states would get warm bodies to travel throughout the country “cold calling” sellers on the chance they exceed the revenue threshold. These sellers would then need to be processed through the state’s registration system and those accounts maintained and audited going forward. California reportedly will spend $10 million dollars over the next 3 years to add 35 people to collect Internet sales taxes. How much will states with presumably less prospective tax be willing to spend?
What about sellers who are too large to sneak under the threshold? Are they doomed to collect tax in all the participating states? Legally, yes. In practice, maybe. Collection and reporting of each state’s sales tax will be based on the destination point. I can easily envision some sellers “accidentally” recording sales made to one of these states as if the sales were made to a state where the seller is already collecting and reporting. Or better yet, to a state that hasn’t qualified for inclusion in the program. Or best of all, to a state with no sales tax such as Oregon or New Hampshire. I don’t expect such actions to be widespread but it will happen and it will probably be the smaller sellers who are doing small volume in these states using accounting systems that allow for such manipulation. The largest retailers will have smallest incentive not to play fair; it will be the companies at the other end of the spectrum that will be impacted the most.
But as suggested earlier, at least some participating states will have little to no resources with which to audit these remote sellers. In these cases, it will be business as usual for the remote sellers since the odds of getting caught will be minimal. One thing that could help participating states would be identifying remote sellers who are actively selling into their state but not yet registered. And how do they identify these unregistered remote sellers? By more in-depth accounts payable audits of current taxpayers! So audits of in-state companies would take longer as auditors attempt to ferret out these remote sellers in order to build a database from which to select the most likely candidates for follow-up.
These are just a few of the issues that come to mind when I consider the nitty gritty of implementing a bill such as the Main Street Market Equity Fairness Act. States will receive some increase in sales tax revenue but it won’t come without costs. Limited resources will be stretched even further until the increased revenue exceeds the monetary costs. But presumably there will also be public relations costs for contacting remote sellers in attempts to determine which side of the small business threshold they fall on and for spending more time onsite during sales tax audits of in-state taxpayers. Ah yes, tax fairness and equalization!
Other recent “Audits and Sales Tax” posts by Lloyd Geggatt:
- Software Audits for Buyers & Sellers – and the 3 Key Questions
- Luxury Audits: Empty Boxes Full of Champagne Wishes & Caviar Dreams
- Sales Tax Audits: Actual Basis Approach Can Result in "Win-Win".
- What Auditors Should Understand About Outsourced Sales Tax Returns
- Auditing Sales Tax Credits: An Auditor's Top 2 Considerations