Particular bad: A business will not be liable for errors in its tax returns if they were prepared by a certified provider. That means no penalties or fees for mistakes. -- What the bill actually provides is that a business that uses a certified provider will not be liable for errors "if the liability is the result of an error or omission made by a certified software provider." (Section 2.b.2.E of the bill) The business remains fully liable for any penalties, etc., that are due to errors or mistakes that originate with errors or omissions the business itself makes.
Other notably imprecisions:
There is a "small seller exemption". If you collect less than $1,000,000 a year from out-of-state customers, you will have no new obligations under this bill. The small seller exemption applies based on remote sales the prior calendar year, so you'll never have any obligation the first calendar year in which you have remote sales, even if you have $10 million in sales out the gate, and you'll never retroactively become liable for taxes for sales earlier in the year as a simple $1 million/year threshold would suggest. OTOH, you also can will liable for remote sales taxes in a year where you have less than $1 million in remote sales, if it is preceded by a year in which you had more than $1 million in remote sales.
Online sellers will be required to collect, report and pay sales taxes in all of the states (once the states meet certain requirements), rather than only the states the seller has a physical presence in. Well, all of the states that (a) have sales and use taxes, and (b) choose to apply them to remote sales. Presumably, all the states that meet (a) will eventually do (b), but not all states have sales and use taxes to start with.
Each state that wants "remote sellers" to collect sales tax must establish a single entity to manage tax collection and audits for the entire state. Sellers won’t have to deal with all 5,900+ separate taxing municipalities in the country, just 50. This makes the typical mistake of assuming that there are 50 'states' in the sense used in the act, but that's not correct; 'state' in the bill are defined to include "each of the several States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, American Samoa, the United States Virgin Islands, the Commonwealth of the Northern Mariana Islands, and any other territory or possession of the United States.", so there are not less than 57 potential taxing authorities.
Government mandates the creation of a new Intuit to do for sales tax what income tax prep services have accomplished for income tax: create a giant industry based on the artificial engineering of byzantine rules.
Just as every income tax prep service represents someone whose economic energies are devoted to an invented waste process instead of real innovation or human accomplishment, soon there will be a horde of sales tax prep services draining the pool of developer talent that could be expended on big (and real) problems instead.
Fortunately most 'big' problems these days seems to be based around split testing landing pages and sales funnels, so it won't be too great a burden on our society.
> Each state that wants “remote sellers” to collect sales tax must establish a single entity to manage tax collection and audits for the entire state. Sellers won’t have to deal with all 5,900+ separate taxing municipalities in the country, just 50.
Even in a best case scenario it seems like this is going to involve live access to state "software"/API to keep up-to-date with ever changing municipal tax rates, "tax free weekends", and all kinds of other things that usually only affect physically local businesses.
So states are going to be responsible for keeping their databases up to date and maintaining access to them? What happens when State X forgets to update that County Y had a tax free weekend for Z items? What happens when the server goes down and no one can calculate rates? What happens when it's just really slow and you have to give customers slow page loads in the checkout process?
Even with states and certified providers as middlemen, I'm not looking forward to the implementation of this...
Edit: Thanks, dan, so maybe we'll be able to cache some rates. Though we still may need reliable & quick access to state servers to figure out which rate belongs to each 9 digit address... Hopefully the states can be about as reliable as FedEx/UPS rate querying services, though the odds are at least one state will have some ugly blackouts at some point...
States have to provide sellers and software providers with 90 days notice of any changes to their tax rate, then update both their database and their software for computing taxes. This, coupled with the state-wide sales and use tax harmonization requirements (for remote sellers), only local businesses will have to worry about things like "tax free weekends" and short-notice changes. It's still going to be a mess.
It can be heinous. In theory I love sales taxes, but I have friends who simply could not get their home state to give them a yes/no question on whether an item was taxable.
Is anyone else a little unclear on why it should work this way? If I live in California, fly to New York, and then go on a shopping spree, I'm going to pay the New York tax rates that will end up going to New York. The store doesn't ask me where I'm from, charge me California tax rates, and then send the money to California. That would be absurd.
I also can't claim that, since I live in California, I shouldn't pay any New York sales taxes. I'd be laughed out of the store ("interstate commerce" be damned).
Wouldn't it make more sense for an online retailer to charge their local sales tax rate for everyone? Why is this the only option that isn't being seriously entertained?
I have one theory as to why: It would penalize online retailers that happen to be based in a high-tax location. As a Chicagoan, for example, I would have a really hard time starting an online retailer if my customers all had to pay the 9.25% Chicago sales tax. It seems like bad policy to discourage tech companies from locating in big cities, which often have higher sales tax. Also, it would be hugely unfair to companies that predate the bill and are based in big cities--are they supposed to pick up and move?
Another reason: The idea of the business's local tax rate is less coherent for larger companies that have multiple bases of operation. Suppose I have several offices throughout the country, plus a bunch of warehouses. Which of these would count as my home base for tax purposes?
My question is what happens if a state's API is down? Are the businesses supposed to eat the cost of whatever tax will be charged? Would the transactions be allowed? It seems like a decent idea, but there is potential for disaster depending on the implementation.
Where can you find more information about becoming one of these certified software providers? It seems like it could be a pretty easy web service to deploy that once it's up, it really becomes a simple matter of keeping your database up to date which, hopefully, is provided in some sort of machine readable format from each state and preferably in the same format.
Also could be a pretty snazzy way for a company like Shopify or the payment providers like Stripe, to make an extra buck as they'll already implement this for their customers, anyway, and it wouldn't be too far of a stretch to make it a service anyone could integrate with.
Every article I read about this focuses on "online" businesses, but doesn't the current exemption stem from a legal precedent set by a case involving a mail order catalog company? Is the bill Internet specific, or is it just that mail order is such a small market no one is even talking about it?
The bill isn't internet specific; it applies to any kind of sale into a state the seller has no local nexus in. That would apply to mail or phone orders as well.
* There is a “small seller exemption”. If you collect less than $1,000,000 a year from out-of-state customers, you will have no new obligations under this bill.
I'm not sure if you're in the US, but sales tax here differs from other parts of the world. The buyer expects to pay sales tax as a separate line item. It is added to an order, rather than included in the price of an item, so this wouldn't have any effect on margins. You would have the additional overhead of tracking and collecting sales tax, however. That will have a negative effect on margins, but as an indirect operating expense rather than a direct cut from sales.
It will affect margins, because now you have the costs of this extra complexity in your accounting, or you have to pay a service provider to handle it for you.
By "in the soup", I mean responsible to compute and capture taxes from whatever members of the 9,000 jurisdictions that are applicable.
The point here is that 1M in sales equates to only 100K in profits given very generous margins. Anybody selling physical product is going to be constrained under this law almost as soon as they move from a hobby to a very small ongoing online business concern. If your margins are only around 3-4%, it might not be worth the effort. You could end up with significant additional business expenses before you even get to the break-even point.
There's a reason E-bay is against this and Amazon/WalMart is for it. This is a walled-garden giveaway. All the small fry will now have to find some walled garden to operate in -- or suck up a lot of extraneous regulatory crap that they probably can't deal with. A lot of tight-margin cottage businesses will not be able to hack it [insert long discussion about whether they should have known this going in, etc]
Seems like a good business opportunity for someone to open a software-selling business in all 50 states, take .5% of sales plus add necessary tax depending on buyer address and deal with the sales tax. I really hope it doesn't come to this. If states are that desperate wouldn't a flat-rate federal tax cover it and distribute it evenly?
> Seems like a good business opportunity for someone to open a software-selling business in all 50 states, take .5% of sales plus add necessary tax depending on buyer address and deal with the sales tax.
You'll need to compete with incumbent providers, including Intuit's TaxCloud, that do this free of charge (for retailers, they do get money from the states) for multiple states. (Currently, only for the 24 states that are part of the Streamlined Sales and Use Tax Agreement, but under the terms of the new bill, those would be the exact states that would be qualified to collect remote sales taxes without doing much new; certainly, those same incumbent providers are going to be adding support for new states as soon as they start either joining the existing Agreement or meeting the requirements, including establishing certification procedures for software providers, under the new bill for states that aren't part of the Agreement.)
Have any payment processors announced plans to get into this? I'm already talking to a payment processor to charge credit cards, so if they added a tax calculation API it would almost certainly be easier for me to integrate that into my systems than it would be to deal with some totally separate tax calculation service.
There's already big players in this field, because it leverages what many states have already done under the Streamlined Sales and Use Tax Agreement. See, e.g., Intuit's TaxCloud https://taxcloud.net/tour/
That's not to say there isn't room to disrupt, but even though the bill is new, the field of software/services is not new, and its not an empty field that new entrants get to define.
I'd like to follow the lobbying money trail on this and see if it leads back to someone like Intuit who is now going to be peddling their "one stop shop" service for this, for only a 1% service charge on the sale amount.
States strapped for revenue often take a 'guilty until proven innocent' attitude towards taxes - first you file your taxes, then they claim you screwed it up and owe them money, then you waste your time proving you did it right in the first place. They aren't particularly competent, either - often they make mistakes.
Now you roll the dice each year and see if your state government happens to be rapacious or incompetent - sometimes you're lucky, sometimes you're not. After this bill passes, you'll get to roll the same dice fifty consecutive times.
ADD: "Since integrating 50 different software packages into every online store, filing 50 different sales tax returns, cutting 50 checks, and getting audited by 50 states is not an appealing idea to most small businesses, they’re almost guaranteed to pay a certified software provider to handle it."
I'm a little confused. As I understand it, there are over 9,000 various jurisdictions -- down to the zip code+4 level that implement various forms of sales taxes. You can be on one end of a street and pay a completely different tax than you would on the other.
According to the article: "Each state that wants “remote sellers” to collect sales tax must establish a single entity to manage tax collection and audits for the entire state. Sellers won’t have to deal with all 5,900+ separate taxing municipalities in the country, just 50."
> The bill appears to address the collection/audit concerns, but not the burden of correctly calculating the tax due on any particular sale.
The bill addresses that by requiring each state to provide software free of charge to retailers that does that for the entire state, and by providing explicit uniform rules for sourcing (well, technically, there are two sets of sourcing rules -- one in the bill for states that are not part of the "Streamlined Sales and Use Tax Agreement", and one in that agreement that the bill adopts by reference for states that are a member of the agreement.)
You provide the sourcing information (applying the rules in the bill for sourcing), the state software provides the tax rate. The state software is the only part that has to care about identifying substate jurisdictions and applying their rules.
It addresses that too. The states have to provide an API where you give them the address of the customer, the type of transaction, etc. and they tell you what the tax rate would be for it.
You make a very excellent point concerning virtual goods above all else. That one point specifically concerns me. I should read the bill to see if virtual goods are explicitly exempted, or classified as a taxable item. Of course, one could argue about whether or not such 'virtual' goods exist--if they didn't, we wouldn't be able to talk about them.
Regarding your other points, the bill requires all tax collections to go through a single entity for each taxing state/territory. You don't file taxes with every jurisdiction.
> That one point specifically concerns me. I should read the bill to see if virtual goods are explicitly exempted, or classified as a taxable item.
The bill doesn't address what goods are taxable; those are set by states. The bill simply sets the conditions on which states can extend the sales and use taxes they collect on goods sold by vendors within the state to goods sold into the state by remote sellers.
Which are all free to have different categorization schemes as to what counts as what, correct? (If I understand correctly, this categorization could vary by street level. Chainsaw selling to this house is home improvement, to the house next door it's construction)
That problem won't exist; you may still find differences between the states, but that's it. Only the states set the categorizations for sales tax on remote sellers. This harmonization of a state's sales and use taxes into a single set of rules managed by a single entity for remote sellers is one of the requirements of the bill.
I'm the first one to rant about this -- not very happy.
But you have an excellent point. The software provider feature could be a life-saver.
Of course, many times these things look very different in bill form than when deployed. This sounds very similar to a "magic cloud" that exists in many architecture diagrams :)
ADD: And if you're looking at software providers, I'd be interested in running the numbers to see how their business model would work. They'd have to take payment. They'd have to be bonded. They'd have to collect from the states, provide a categorization system, keep files updated, file paperwork along with monies. Would they have to work internationally? Be categorized as a money Exchanger by treasury department? It doesn't sound cheap. But it certainly sounds like something Amazon would be happy to provide as an API.
It's the sum of all sales to customers in states where you have no local nexus during the previous year. One of my bullet points summarizes the rule for determining the taxing locality; shipping address has priority over billing address.
Particular bad: A business will not be liable for errors in its tax returns if they were prepared by a certified provider. That means no penalties or fees for mistakes. -- What the bill actually provides is that a business that uses a certified provider will not be liable for errors "if the liability is the result of an error or omission made by a certified software provider." (Section 2.b.2.E of the bill) The business remains fully liable for any penalties, etc., that are due to errors or mistakes that originate with errors or omissions the business itself makes.
Other notably imprecisions: There is a "small seller exemption". If you collect less than $1,000,000 a year from out-of-state customers, you will have no new obligations under this bill. The small seller exemption applies based on remote sales the prior calendar year, so you'll never have any obligation the first calendar year in which you have remote sales, even if you have $10 million in sales out the gate, and you'll never retroactively become liable for taxes for sales earlier in the year as a simple $1 million/year threshold would suggest. OTOH, you also can will liable for remote sales taxes in a year where you have less than $1 million in remote sales, if it is preceded by a year in which you had more than $1 million in remote sales.
Online sellers will be required to collect, report and pay sales taxes in all of the states (once the states meet certain requirements), rather than only the states the seller has a physical presence in. Well, all of the states that (a) have sales and use taxes, and (b) choose to apply them to remote sales. Presumably, all the states that meet (a) will eventually do (b), but not all states have sales and use taxes to start with.
Each state that wants "remote sellers" to collect sales tax must establish a single entity to manage tax collection and audits for the entire state. Sellers won’t have to deal with all 5,900+ separate taxing municipalities in the country, just 50. This makes the typical mistake of assuming that there are 50 'states' in the sense used in the act, but that's not correct; 'state' in the bill are defined to include "each of the several States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, American Samoa, the United States Virgin Islands, the Commonwealth of the Northern Mariana Islands, and any other territory or possession of the United States.", so there are not less than 57 potential taxing authorities.