For a long time, many consumers have been drawn to the Internet because of the simplified commerce available there. While they may have had to wait a little longer to get their products than they did shopping in the real world, shopping online was more convenient and it lacked one critical frustration that real-world shoppers dislike: sales tax. However, many of those shoppers may have begun to notice their Internet bills creeping up recently. That’s right. Sales taxes have come to the Internet.
The Sales Tax Issue
Internet merchants fought against the application of sales tax for years but the war is over. If you have bought anything on Amazon, eBay or another popular site on the Internet recently, you may have noticed sales tax being tacked on to your purchase at the end of the transaction. The rules regarding the application of sales taxes have been confusing and hard for many Internet vendors to utilize. This has resulted in erratic use of the taxes. However, a streamlining effort has been underway for some time now and is likely going to make this phenomenon permanent.
Up until now, sales taxes have been unevenly applied by using Nexus, which is a way of defining whether such taxes apply to each transaction. The current requirements declare that online retailers must collect sales taxes from customers when those retailers have a physical presence in the same state. There are also additional rules which sometimes apply sales taxes to transaction made with out-of-state customers.
The Supreme Court weighed in on this issue when it ruled in the Quill vs. North Dakota case. The ruling of this court states that Internet merchants must collect sales taxes on transactions when the vendor has or uses property in the same state. This definition is broad enough to include even a temporary residence or just people working in that state for the business.
This is easier to say than to do. Many online businesses have found themselves mistakenly failing to comply with this ruling because they have misinterpreted the definition of their physical presence. As it turns out, if a business even employs someone who happens to travel into the state in question on business, they have a physical presence in that state and must collect sales taxes on a ecommerce transaction conducted with customers from that state.
The Marketplace Fairness Act
To avoid all the potential financial consequences for these errors, new legislation proposes to simplify the whole issue for everyone. The bill which proposes the Marketplace Fairness Act is going to mandate that all Internet merchants impose and collect state and local sales taxes when they engage in online transactions.
This would be an extreme burden on businesses, given the complexity of the wide variety of local and state sales taxes and the rules surrounding their use. Fortunately, other Supreme Court rulings have encouraged the writers of this bill to give states options with regard to ensuring compliance with this new regulation.
The first option allows states to join with others in the Streamlined Sales Tax and Use Tax Agreement. States and businesses spent 11 years crafting this agreement. It makes it easier for all involved to impose, collect and distribute sales taxes.
Alternately, the Marketplace Fairness Act allows states to apply five rules regarding simplification. These include rules specifying how the states can notify online retailers of rate changes and other vital information. The goal is to determine and fix a single, statewide sales tax for each member state. Free software will be provided to help manage compliance with this issue.
The end result for each member state and retailer will be collection of sales taxes on all transactions which involve the shipment of goods to these states. However, this act will not include small online retailers. They will not be left, though, to fend for themselves.
There is an exception within the bill which will exclude smaller businesses from having to collect sales taxes. If a company earns less than $1 million in ecommerce sales within the United States during a tax year, it will be exempted from collecting any sales taxes at all. However, this exception will still only apply to remote sales in which the retailer does not have a previously defined physical presence in the state.
These changes have been approved by many major retailers as well as the states involved. The struggle against the application of taxes is over and all concerned are trying to find ways to adapt gracefully to the new environment.