In 1992, the U.S. Supreme Court ruled that states couldn’t require businesses to collect state sales tax unless the businesses had some sort of in-state physical presence. These expanded definitions of physical presence have made it increasingly difficult for businesses to keep track of all of the jurisdictions in which they need to collect sales tax. Yet the basic rule still holds true today: no physical presence, no sales tax obligation. Enter the Marketplace Fairness Act of 2013 (MFA). Often called the “online sales tax bill,” if passed, it could be extremely disruptive for all retailers.
The Act, which has passed the Senate and is still awaiting debate in the House, would grant states the authority to require out-of-state businesses to collect sales tax, even if they lack an in-state physical presence. This in turn would require states to simplify their tax code, such as creating more uniform sales tax rates, rules and boundaries.
Who would be impacted by MFA?
Understanding the scope of the bill is critical. Many make the mistake in thinking that this “online sales tax bill” would apply only to Ecommerce sales. When in fact, the MFA could actually apply to any business that currently sells into states where it does not collect sales tax, whether a business sells via an online store, catalog, or phone. Even if it’s a manufacturer that sells and ships into states in which it doesn’t currently collect sales tax, under the MFA it might have to start collecting.
On the other hand, businesses that already collect sales tax,would continue to do so: the MFA has no impact on current sales tax obligations. In addition, small sellers that meet the bill’s small seller exception will not be required to collect under the MFA. As it is currently written, the small seller exception exempts any business that grosses $1 million or less in total U.S. remote sales.
How will the MFA impact business and what organizations can do to get ready
If the bill passes, businesses may have to start collecting sales tax in states they previously had not within 180 days of the date the bill becomes law. Rather than waiting to see if it passes, businesses that want to minimize risk and maintain a competitive advantage will need to examine their current sales tax process to determine if there is anything they can do to get ready.
The collection of sales tax has always been a source of frustration for retailers, especially with the 11,000 taxing jurisdictions in the U.S., and thousands of rate, boundary and rule changes that happen each year. Current retail software systems just aren’t built to support multi-tax or deal with this level of volume and the back office is going to find it difficult to scale and will require dedicated resources to manage. The bottom line? Getting sales tax right is nearly impossible without help.
First, retailers will need to take a hard look at their financial systems and try to consolidate them onto a single platform or try to find ways to reduce friction between platforms. Solutions such as NetSuite already work out of the box to handle any tax challenges. Retailers are able to calculate, collect and also remit sales tax automatically from a single, cloud-based platform.
Retailers may also choose to supplement the capabilities within NetSuite or another solution by leveraging a sales tax automation solution such as Avalara’s AvaTax, both to deal with current sales tax collection burdens and be better prepared to deal with the potential new requirements created by the passage of the MFA. Avalara is a NetSuite SDN partner, has built the AvaTax SuiteApp leveraging the SuiteCloud development platform, which is tightly integrated into NetSuite and easily accessible to NetSuite users from within the NetSuite management console.
There is no way around it. With the possibility of the passing of The Marketplace Fairness Act, retailers are going to have to work harder to maintain a competitive edge. By having a system in place that is already able to support and manage the new tax laws and by leveraging dedicated applications, the burden will be minimal and will allow retailers to instead focus on running their business and finding new ways to compete and improve the overall customer experience.
-Branden Jenkins, GM of Etail/Retail Products, NetSuite