I was skeptical when Amazon (i) reached an agreement with California to drop its opposition to California’s Affiliate Nexus law in exchange for a one year delay in opposition and (ii) declared that it would use the year to lobby for a nationwide solution. Amazon’s prior reactions to state sales taxes was so swift and strong, the turnabout was too complete and sudden to be believable.
But it now appears that Amazon was sincere in their change of heart. The company says that it strongly supports a new bill in the Senate called the Marketplace Fairness Act. It was introduced by Republicans Mike Enzi of Wyoming and Lammar Alexander of Tennessee. The bill also has a bipartisan group of eight co-sponsors.
So how does the new Marketplace Fairness Act compare to the former Main Street Fairness Act? The new act gives a little more flexibility to states and a little more potential complexity to online businesses. The Main Street Fairness Act required states to conform to the Simplified Sales and Use Tax Agreement (SSUTA) in order to enforce the collection of sales taxes across state lines. The Marketplace Fairness Act allows the states to conform to the SSUTA, or to make changes to their sales tax laws. This might be attractive to states with complex sales tax laws and rules that might contradict the SSUTA in some respects. But the SSUTA’s primary benefit involves giving small businesses just one set of rules to understand.
The minimum changes for those States that do not accept the SSUTA are:
- A single taxing authority, reporting form, and auditing authority for the entire state, even if there are local sales taxes.
- A single set of rules regarding what is and is not taxable even if there are local sales taxes included.
- Accepting that sales taxes are based on the sale’s destination location.
- Provide software and/or online services to tell, for any destination address and category of goods, (i) what the sales tax rate should be and (ii) to hold the sellers harmless for any errors resulting from any mistakes in the results of the software/service.
Reciprocity of reseller numbers would be a worthwhile addition to the bill. In other words, a retailer should only have to apply for a resale number in their own state, rather than in all states.
Perhaps the most important thing is that the SSUTA explicitly, and the minimum requirements implicitly, allow for consolidators. Consolidators make the Internet sales taxes easy and invisible to the typical e-commerce firm.
Most e-commerce hosting providers would either establish their own consolidator or partner with one. The e-commerce site would pass to the consolidator the tentative sale (price, category of goods, and customer destination). The consolidator’s computer would then query the state’s computer for the proper sales tax rate on each item for that sale. The applicable tax will then be displayed and added to the price. When the order is completed, the e-commerce system would contact the consolidator with the confirmed final sale and the consolidator will wire transfer the sales tax portion of the sale to their holding account. The consolidator would then handle the payment and paperwork to the states.
Under this model, the consolidator isolates the e-commerce seller from the complexity of all the state laws. What will consolidators charge for all that convenience? You may find this surprising, but some are already offering to do it for free. Why? Because the tax is collected from the merchant at the time of sale but paid to the state on some longer reporting schedule (e.g., weekly, monthly, quarterly, etc., depending on the state). The consolidator gets cash flow float for the price of some servers, processing, and an Internet connection. For example, Amazon did $10.88 billion in sales during the last quarter. If we presume an average tax rate of 5 percent and an average holding period of 30 days between collecting the tax and passing it on to the states, then Amazon gets $181 million in average float on which it can earn interest. With these large numbers, Amazon would likely offer to be the consolidator for the many sites that it hosts.