Senate & House Fast Track Internet Tax
Yesterday, Megan blogged about the Streamlined Sales Tax Project (SST). SST is a cooperative sales tax initiative for voluntary states. The states come into compliance and agreement together to figure out a way to collect sales tax on every sales, based on the “destination” of the sale. In other words, if you live in California and buy from a Florida merchant, you’ll pay California sales tax. It’s a nightmare for the Florida merchant because she now has to track sales tax rates and rules in 50 states.
SST has gotten stalled. Apparently, it’s hard for independent states to agree on the details. And now it looks like they might not have to.
Big Brother Congress has decided it’s time to take care of the sales tax issue to raise taxes quickly. Dubbed the “Internet Tax” it was struck down a few years ago by an aggressive lobbying effort by Amazon, eBay and other big online sellers (and auction houses).
Here’s a link to a great CNET article on the resurgence of the Internet Tax project. http://news.cnet.com/8301-10784_3-9919420-7.html
The problem I see is that it’s simplistic and idealistic. SST got bogged down because the definitions of what is taxable and non taxable vary radically from state to state. Other states have city and local taxes that are based on origin. SST was attempting to modify to allow for that. For example, if you had a business in Dallas and sold to New Jersey, your business would collect tax for the Dallas city sales tax and the New Jersey state sales tax. I don’t see any solutions like that in the Internet Sales Tax. It simply doesn’t have the finesse that is required to make this work for businesses.
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As I read through the story and turn it over in my head, it leaves me wondering about how it will be implemented from a practical standpoint. I came to this conclusion:
Sales tax will be charged at the source - meaning that if you buy from an Internet-retailer based in Memphis, you’ll pay Tennessee sales tax, unless that retailer also has a shipping location, warehouse, etc., in your state, and then you’ll pay that state’s tax instead;
States that don’t charge a sales tax, like Oregon, will see an uptick in businesses, as major retailers look to relocate.
Use tax audits at the state level on business and personal taxpayers (especially personal) will rise.
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Megan Hughes
www.businessfirstformations.com
Last week, my business had its best month ever.
Hmm. Under Megan’s scenario, what happens if it’s a Clickbank product (out of [name of State]?), or eBay, etc? Does that level of infrastructure impact anything?
What if Paypal takes the payment and they’re not in Wyoming?
Just thinking here.. if an IMer (internet marketer) moves to Oregon, is that really where the sale occurs in examples as above? The sale trickles back to the original business, or they’ll try to capture some revenue before it gets home to Tax Haven, New Hampshire?
Okay, this is where it gets tough. In fact, I was planning a blog entry for next Mon on this. How do you handle digital downloads? The states are almost evenly divided as to which state charges sales tax and which does not.
Megan, I read it too - I thought it was destination based, not origin. But I see where you got what you said. I don’t know what is right! Hopefully they give us a lot better guidance before it launches. And of course my ongoing question is how will you track what is taxable in one state versus another state. Some charge tax on shipping for example, others charge on certain kinds of labor.
I can’t even imagine how hard this is going to be to track.
I don’t know either … I was trying to think of what would be the most logical solution and the quickest to actually implement.
In my mind this model works, because it would essentially treat the internet retail experience the same as going into a brick & mortar store - you pay where you buy. And, businesses already know their local tax responsibilities, so not much retooling there. You just collect tax on all of your sales.
You’re absolutely right about the digital download issue, drop-shipments, and and many more - it’s not as clear-cut as it sounds by ANY stretch of the imagination.
But, as we’ve been discussing on the Forum this week, politicians aren’t necessarily economists or strategists. That’s why I’m figuring they’ll go with a very simplistic solution … which may not make sense in practical terms!
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Megan Hughes
www.businessfirstformations.com
Last week, my business had its best month ever.
We sell to all 50 states, so this is a big issue for us. Right now we collect sales tax based on destination and where we have a physical presence (or Nexus) which are MD and CA. So if we ship to any state other than MD or CA no sales tax is collected.
So Megan, would we now be charging MD tax on all the other 48 states or would we be charging MD tax if the product was shipped from our MD warehouse and CA tax if the product was shipped from our CA warehouse?
Isn't the destination taxation currently in effect based on state law, not federal? i.e., if we ship a product to CA then CA wants the sales tax no matter where we shipped it from, i.e., MD, CA or a drop-shipment from TN. Under the new plan if it was drop-shipped from TN then CA would lose out on the sales tax it was used to getting.
Mary
http://thisnthatgreatwebsites.com
http://bridgeway2success.blogspot.com/
http://bridgeway.merchantrates.com
I remember seeing somewhere that there are something like 40,000 separate sales tax jurisdictions in the US, because so many counties and cities can have their own sales taxes in addition to the state-wide tax. All with different rules - for example in MA clothing under $150 is not taxed. And then there’s tax holidays - we usually have one every year, where certain purchases are exempt from sales tax for a day or a weekend. It would be an impossible burden for a small business to track all of this.
Origination tax makes much more sense, if you can define origination! For on-line businesses, I would think using the location of the company’s owner or main office or whatever would make the most sense. I never understood using server location, or anything involving where the transaction takes place in cyberspace, you may not even know where that is, and it could be offshore.
In MA, there is a use tax “safe harbor” - you can just pay a small amount (I think it usually winds up being $30 or $40) when you file your state income tax return, and then you don’t have to worry about getting audited for it, or keeping track of it.
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Charlie
We decided when we first started our business that it would be too difficult to keep track of what is and isn't taxable, so we just tax everything! I think it would be a small percentage of what we sell that would escape sales tax anyway.
Mary
http://thisnthatgreatwebsites.com
http://bridgeway2success.blogspot.com/
http://bridgeway.merchantrates.com