Internet Sales Tax

New Internet Sales Tax Grab Decimates Channel Sellers

by Mark Faggiano

Remote Transaction Parity Act 2015

There’s a new internet sales tax bill in town.

On Monday Representative Jason Chaffetz (R-UT) introduced the “Remote Transaction Parity Act” (RTPA) to Congress. According to rumors before the text of the act was available, this new stab at an internet sales tax was designed to deal with some of the gripes about the Marketplace Fairness Act.

Who’s gripes? Not the online sellers who would bear the burden of this bill. This newest congressional power grab is ridiculous and actually has the power to cripple the economy.

What’s wrong with the Remote Transaction Parity Act?

You can read the full text of the RTPA here, but we’ve bulleted the gist of the bill:

  • All sellers who use a channel like Amazon or eBay, despite their sales volume, would be required to collect sales tax in remote states. Yes you read that correctly.
  • The bill allows states who meet certain criteria via the Streamlined Sales Tax Program to require “remote sellers” (i.e. sellers with no sales tax nexus in the state) to collect sales tax from buyers within state borders
  • Other online businesses will be slowly phased in. During the first year after the bill passes, businesses that make more than $10mm in gross sales will be required to collect, during the second year business that make more than $5mm in gross sales will be required to collect and during the third year businesses that make more than $1mm in gross sales will be required to collect sales tax
  • States must make sales tax boundaries and taxability info available to sellers in an easy download
  • States must pay national “Certified Service Providers” and offer their services for free to sellers
  • Certified Service Providers must offer sales tax software for free to sellers
  • Certified Service Providers:
    1. Determine the correct sales and use tax based on sourcing rules and calculate the sales and use tax due at the time of sale
    2. Generate and file sales and use tax returns electronically
    3. Remit the sales and use taxes to states electronically
    4. Report all transactions processed to the remote seller
    5. Respond to sales and use tax audit requests for remote sellers
    6. Provide safeguards and protections of any consumer privacy in data stored by CSP
  • Limitations of the bill: States can’t tax remote sellers differently than sellers with a nexus relationship, this act doesn’t create new nexus relationships
  • States can audit any seller they suspect has “misrepresented” information, such as the amount of sales tax owed

So what would this act mean for online sellers if it passed?

Unbearable Burden on Amazon, eBay and Other Channel Sellers 

If this bill passes, all channel sellers – no matter how much they make – would be required to collect sales tax in 45 states.

Small sellers who sell on eBay, Amazon or other channels as a hobby, or use it to support their families would be placed in a position where they have to follow 45 different states’ sales tax laws. Worse, they’d be open to audit from 45 different states.

This language is unambiguous:

Internet Sales Tax RTPA

Electronic marketplace is later defined in the bill as: “a digital marketing platform where (A) products or services are offered for sale by more than 1 remote seller; and (B) buyers may purchase such products or services through a common system of financial transaction processing.”

In other words, any seller who sells on eBay, Amazon, Etsy or one of the thousands of other eCommerce platforms out there will be required to begin collecting sales tax in all participating states. For the simplest business – say an eBay seller with a side hobby selling thrift store finds – this would mean going from collecting sales tax from buyers in her home state to potentially collecting sales tax from buyers in all 45 states (plus D.C.) with a sales tax.

To make matters worse, the bill clearly states that all tax rates will be calculated at the buyer’s destination. In over 10,000 taxing districts. The bill states that “Certified Service Providers” will take care of this for merchants, but we’ll get to the problems with that in a minute.

If this act passed, would a small seller who makes a living for her family selling online still consider selling on eBay or Amazon worth the cost and headache? How about the potential liability?

The last thing any law should do is discourage Americans from operating businesses. This law does just that.

The Gross Sales Threshold is Laughably Low

I never thought I would yearn for the Marketplace Fairness Act. But at least in that bill sellers who made fewer than $1mm in “remote sales” (i.e. sales into state where they don’t have an existing nexus relationship) were exempt. Even that number was very low when you account for the narrow profit margins in eCommerce. But this bill is even worse. Only sellers who make less than $1mm in “gross sales” can be exempt from collecting sales tax in remote states. There are plenty of online sellers who make $1mm in gross sales and still barely make a living. This new bill would place a sales tax burden on even more eCommerce sellers.

Software Still Isn’t a Magic Bullet

When I read the language in this bill around “Certified Service Providers” and all the services they are supposed to perform, I shake my head. There are literally thousands of shopping carts out there and this bill promises a simple, seamless solution to integrate with each one. And on top of that, calculate and electronically file sales tax. I can also tell you with an insider’s perspective that states won’t be ready for this. A number of them don’t have the technical capability to take returns sent electronically from a CSP. And if they do, will they be able to handle the volume this new law would undoubtedly add?

Plus, most online sellers these days sell on more than one channel. Would they have to work with one CSP for one channel and another CSP for another channel? Do they use different taxability tables? How do they talk to each other. And those are just a few of the technological blind spots in the bill. If this bill were to pass lawmakers would quickly discover that what they are proposing isn’t nearly as simple as the imagine.

Nexus Relationships Wouldn’t Go Away

If you have sales tax nexus in multiple states, for whatever reason, this bill wouldn’t change anything about that.

Example: You already have complex sales tax compliance issues because you sell through Amazon FBA and have sales tax nexus in 15 states. The RTPA would not give you any relief. Instead, you would still have your nexus relationship with those 15 states, but you would also now have a “remote seller” relationships with the other 30 U.S. states with a sales tax.

So now you’re basically adding a whole new system of sales tax collection (remote sales tax collection) onto your already complex system (sales tax collection in states where you have nexus relationships)

Conclusion: Congress Still Doesn’t Understand Small Business

This new bill was supposed to address “concerns” about the Marketplace Fairness Act. Who’s concerns? Definitely not the eCommerce sellers who will be adversely affected by internet sales tax.

At TaxJar we’re on the front lines of sales tax complexity everyday. While some kind of internet sales tax would actually be good for TaxJar, we’re totally against all of the proposals that have been put forth so far for one reason – they fundamentally conflict with our core philosophy, which is that we should do everything we can to make life easier for small businesses. Not harder and more complex.

There has to be a solution out there for simplifying small business. But the Remote Transaction Parity Act isn’t it. Back to the drawing board.

  • Mark, this bill won’t go anywhere. It’s an attempt by Representative Chaffetz to remain relevant in the business world.

    • Oh most definitely. And it won’t go anywhere next year due to the election. We just want to make sure people see what Washington gets up to when we don’t pay attention. It’s sad how clueless Congress can be about the day to day lives of so many business-owning Americans who drive the economy (but that’s a whole other conversation.)

  • Steven

    Hi Mark, Is this also how it works for European companies which have FBA in the US?

  • Hi Steven,

    There was no wording in this bill about international companies. From my understanding, international companies would still have their nexus relationships with states. So for FBA sellers, this would be states where they have inventory housed in an Amazon fulfillment center. I believe they would still be required to pay under the current methodology.

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  • Martin Haworth

    So, as it is massively in their interest – not to mention a show of good faith in their vendors – don’t Amazon create a tax collection service bolt on (like Paypal do) to extract this tax from purchasers at the point of payment dependent on their State. Job done! nd they can afford to do it.

    • ryan

      I agree

  • ryan

    I disagree with most of your points. Not because they are wrong, but you fail to show the burden this would put on small e-sellers or the economy.

    How is this different than me going to any local store and paying a sales tax. The burden of the tax doesn’t fall on the seller, but the buyer (as it should be). I certainly would feel as a huge e-consumer this deterring me from continuing to make online purchases.

    I have reaped the benefit of not having to pay these taxes for years, but I certainly don’t see them implementing remote local sales taxes a burden.

    • Hi Ryan,

      We go into the burden this puts on small eCommerce sellers a whole lot more in our post about the Marketplace Fairness Act:

      Long story short, right now small online sellers have to know one state’s sales tax laws. If internet sales tax passed, they’d have to learn every state’s laws, exponentially file more sales tax returns, be on the hook for audits from states, spend a whole lot more time on sales tax compliance and generally lose time and productivity on sales tax. Lawmakers don’t understand that software isn’t a magic bullet. We make a sales tax software – and would make a lot of money if an internet sales tax passes – but the 2 proposals (RTPA and MFA) just aren’t right for small businesses. Sales tax compliance is simply too complex and none of these laws take that into account. I hope this answers your question.

      As for reaping the benefit of not having to pay sales tax, I’m afraid that isn’t true. If you don’t pay sales tax on a taxable item, then you technically owe consumer use tax on that item. This is VERY hard for states to enforce, but they are trying to do just that. The recent Colorado Amazon law now requires online retailers to remind consumers about their use tax burden.

      States are desperate for money and are trying to get it any way they can – either by having merchants collect or by having consumers remit it on the state income tax returns. While we don’t disagree that some kind of sales tax simplification is a great idea, making it harder for small businesses to operate – and slowing the economy – isn’t the way to go.

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