

What startups need to know about the “internet sales tax bill” - dangrossman
http://www.dangrossman.info/2013/04/24/what-startups-need-to-know-about-the-internet-sales-tax-bill/?wp=1

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dragonwriter
There are some notable imprecisions:

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.

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Glyptodon
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.

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joshuahedlund
> 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...

~~~
dangrossman
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.

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ohazi
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?

~~~
jarrett
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?

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jetti
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.

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themckman
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.

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willtheperson
Is there an api in place to provide tax rates for every jurisdiction? If not,
is it the responsibility of the shop owner to keep this updated?

~~~
mpyne
From what I understand the state must provide free software to perform the
needed accounting, or something to that effect.

An API would be even better, of course, but I suspect the free market will
have to do that...

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mrgoldenbrown
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?

~~~
dangrossman
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.

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saalweachter
TL;DR:

* 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.

~~~
DanielBMarkham
So if you have 10% margins, which are great to have, once you start bringing
home 100K a year you're in the soup with everybody else.

~~~
bradleyland
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.

~~~
ams6110
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.

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marquis
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?

~~~
dragonwriter
> 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.)

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tzs
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.

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peterjancelis
Someone with more tolerance for regulatory BS than me should be working on a
Saas app to manage this new complexity.

~~~
dragonwriter
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_.

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ams6110
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.

~~~
adolph
Maybe states will pick up the cost of the tax rate info aggregation. The FAQ
from TaxCloud is pretty interesting:

 _As a Certified Service Provider, we are compensated by participating states
for providing TaxCloud to retailers._

<https://taxcloud.net/tour/faq/>

Also note that they say they rely on Amazon EC2.

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bgmd
This proposal sounds like a very reasonable and fair system.

What's the catch?

~~~
gyardley
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.

------
DanielBMarkham
If anybody is interested, for contrast I had a nice rant on this topic this
morning. [http://freedom-or-safety.com/blog/why-the-internet-sales-
tax...](http://freedom-or-safety.com/blog/why-the-internet-sales-tax-is-
wrong/)

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.

~~~
bobwaycott
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.

~~~
dragonwriter
> 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.

~~~
bobwaycott
Good to know. I figured it'd be that way. Still seems like wholly non-physical
items could become a pain point.

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meritt
Is the $1M threshold per state or overall?

Do you tax a customer based on shipping address or billing address?

~~~
dangrossman
> Is the $1M threshold per state or overall?

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.

~~~
meritt
Great to know. Thanks Dan.

Time to setup my Oregon-based (no sales tax) package-forwarding startup!

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billpg
How does this compare to the European VAT system? (Which has its own rules
about purchasing between EU states.)

