The Marketplace Fairness Act has made some headlines recently. If passed into law, the proposed federal solution is a game changer for U.S. retailers who sell across state lines, but not many understand the Act’s implications. In this blog, we’ll share our understanding of the Act and how it might affect you and/or your clients.
To begin with, the proposed law relates to the concept of nexus. Nexus describes the connections a retailer has with a given state. In the sales tax realm, once those connections reach a critical mass, nexus is established. An out-of-state vendor who establishes nexus in a given state is transformed into a sales tax collector for that state.
Since nexus is the trigger for additional compliance pain and suffering, retailers tend to be keenly aware of how to avoid conceding nexus. Based on current law’s affection for “physical presence,” internet-based retailers have been able to avoid traditional nexus-building connections with ease. Their ability to avoid the obligation to collect may change under the proposed law.
The Marketplace Fairness Act will require sales tax collection by vendors who have historically avoided a collection obligation by relying on “physical presence” standards. The proposed Act defines a deceptively simple requirement: many sales made across state lines will be subject to sales tax collection at the location of the customer regardless of traditional nexus cues. Put another way: businesses that meet the proposed law’s criteria will be required to collect sales tax on all sales made where due.
One crucial element of the new law is the designation and definition of sales made across state lines. A new term has been established: ”remote sales.” Since the law establishes a floor (exempting small vendors from compliance), understanding which sales create the obligation and which sales don’t is an important element. The element of “remote sales” is the cornerstone of the proposed law’s applicability.
The proposed law divides your company’s sales into two categories – remote sales and all other sales. Once your company reaches $1,000,000 in annual remote sales, the obligation to collect in all sales tax states is triggered. Sales that are not remote sales do not count towards the million dollar collection threshold.
Remote sales are those where no sales tax is collected because your company lacks nexus under current nexus principles but do not include sales made to re-sellers or to other non-taxable entities. Remote sales also include those where sales tax is not calculated solely due to the lack of an obligation to collect. Finally, the tally of remote sales is not dependent on the underlying taxability of the items sold.
The takeaway? Determining the amount of remote sales for purposes of the proposed law will be an important first step for any vendor intending to comply.
If you have questions about the Marketplace Fairness Act or its implications to your business or to your clients’ businesses, please post a comment or contact me directly at [email protected]