Avalara Government Relations Guy Says Audits Not an Issue – Phew!

This document originally appeared in the October 14, 2013 edition of State Tax Notes and is found here

There’s quite a few whoppers in this article, I had to take a few of them down.

  • If proponents’ estimates are correct that fewer than 1,000 remote sellers would meet the Senate bill’s threshold, most retailers may continue to be audited the same way they’ve always been.

Emainstreet alone has almost that many members.  There will be far more remote sellers that are in the retailer category.  Tens of thousands is more likely.  Less than 1000 is a lie, to help pass MFA.  If I remember correctly that idiotic number came from someone looking at the Internet Retailer Top 1000 list.   FYI, most people don’t want to share their numbers to make that list.  That list doesn’t contain any of my main larger competitors, all of which would clearly make the list.  It’s a very incomplete list at best, worthless for this type of purpose.  And if there were really less than 1000 online retailers that would be over the $1 million threshold, what would be the point?  A large number of them are big chains that already collect the tax.  There’s probably that many Ebay sellers alone.

A University of Maryland paper from 2008 is referenced in Streamlined States discussions and puts the number of Internet retailers with sales between $1 million and $10 million at 28,128 retailers.

More importantly, the number ignores the fact that wholesalers/distributors/manufacturers are ALSO remote sellers under the law, even if they’re a true wholesaler that doesn’t sell at all to the public.  Over $1 million is quite easy to hit and tax exempt sales also count towards that total.

Audits Under Streamlined Auspices

“”I was constantly pushing Streamlined’s Audit Committee to come up with a way of doing one audit,” said Scott Peterson, who last year stepped down from his position as executive director of the governing board.

An early version of the federal Main Street Fairness Act would have allowed a retailer to request a single multistate audit, Peterson said. The Audit Committee spent years trying to figure out how to make it work, he said.”

Well maybe that should be hammered out before passing a burdensome compliance and financial risk on tens of thousands (or more).

  •  Unsubstantiated Fears?  

“Peterson, who previously oversaw sales taxes as director of the South Dakota Department of Revenue’s Business Tax Division, said he is frustrated by assertions that a retailer could become subject to perpetual audit by 45 states and the District of Columbia if federal remote sales tax legislation is enacted.

“That’s such an easy red flag to throw down with very little substance to back it up,” Peterson said.”

South Dakota is the 2nd smallest state (after Maine) for sales tax gross receipts (US Census 2012 figure).  All states are not equal in how they audit and how aggressive they are.  I’m guessing South Dakota has a lot less to audit than the state of New York or California.

  •  Not really unsubstantiated by his own statement

“While every state into which the remote seller makes sales would have the legal right to audit that seller, few states (italics mine) audit more than 2 percent of their retailers in any given year, Peterson said.”

  • 2% audit in any given year for most states
  • Some might audit a larger percentage
  • 2% is 1/50.
  • 46 possible states have sales tax.
  • That’s almost an average of an audit every year!

Sorry, but this would be an unreasonable burden for a small business.  Just the fact that we’d need to actually answer communications from 45 more states down the road would be a problem.  Does he not understand the math behind his statements?

  • Why would remote states even want to audit?  Really?  Did he say this?

“Peterson said he has always struggled to understand why any state would go beyond its borders to audit someone collecting its sales tax. If some version of the Marketplace Fairness Act were to pass, not only would states benefit from increased collection of their sales taxes, but the amount of use tax that goes uncollected would drop significantly, Peterson said.

“For me it was always a struggle, because I could never figure out why in the world there’d be this need for auditing,” Peterson said.”

States would audit because they can.  Pretty much that simple.  They want to know that they are getting everything they should.  What would the point be of NOT auditing?  Why would anyone comply?  I’m “struggling to understand” his fairly baffling comments above.  The states want their revenue.

Small Sellers and Certified Software Providers

Rachelle Bernstein, vice president and tax counsel at the National Retail Federation wants the exemption level as low as possible.   “We think the technology is there”.

No, it isn’t.  (NRF is a massive proponent of the MFA, by the way.)  She then goes on to tell more whoppers.

“The Marketplace Fairness Act contemplates remote sellers taking advantage of government-funded certified software providers (CSPs) for automated sales and use tax calculations and remittance, Bernstein said. It’s possible that the CSP would also handle most — or even all — of the audits for those small sellers that use them, she said.”

  • MFA does not mandate government funded CSPs – Sorry, but we need to focus on the bill and SSUTA as-written, not a gauzy-idealized version of what someone would like it to be.  States will make available free software – no details are in the bill or SSUTA regarding how.
  • CSPs can’t handle multi-channel retailers
  • CSPs would be an initial contact and access to data – audits need more
  • CSPs only would be for “level 1 sellers” who use a CSP for ALL aspects of sales tax.
  • “Possible”?  An awfully-squishy word.  And unlikely.

“Peterson said this is basically true, putting on a third hat to explain how. (Following his earlier service at the South Dakota DOR and on the governing board, Peterson is director of government affairs for Avalara, one of the governing board’s six authorized CSPs.)”

Basically true?  In other words, not entirely true.

“Peterson said there generally aren’t mistakes, but occasionally a piece of documentation might be missing; if there is a mistake, the state will assess Avalara, which has a contract with its sellers that says the party responsible for the error is liable for the assessment.”

Which means we’re liable.

“A second set of streamlining states treats the CSPs’ customers as the seller, Peterson said. When one of these states conducts an audit, it will choose Avalara’s specific customer that it wishes to audit based on the state’s normal auditing practices, and Avalara will provide the customer’s records to the state. These states will send Avalara all notices that otherwise would go to the retailer; if there was an error in the seller’s tax calculation, Avalara would get the audit assessment, pass it on to the seller, and explain what the notice was about. Here, too, Avalara has a contract with its sellers that says the party responsible for the error is liable for the assessment.”

And again, we’re liable.  And this CSP handling issues, it’s only level-1 sellers who might interact like this and any other requests for data (like tax returns) would go to the retailer.  And the state isn’t required to go through the CSP by the way.

“Under both scenarios, Peterson said, the records Avalara keeps are exactly the same, and the states conducting the audits get the records in exactly the same format. He cautioned that the way the CSP auditing function works now isn’t necessarily the structure that would be reflected in Goodlatte’s bill or what CSPs themselves would advocate.”

Fortunately, the article ends with some more realistic and concerned views about the MFA and the audits.  Maureen Riehl, vice president of government affairs for the Council On State Taxation had a lot to say (underlining mine):

“looking at the Marketplace Fairness Act as it stands now, a business still might be looking at multiple audits from multiple sources asking for multiple, different things.

There are streamlining states that have not only their own audit options but also differing approaches to audits involving CSPs. The legislation then creates an alternate category of non-streamlining states, which could require tax collection if they implement their own simplified audit approaches. The MTC would still be conducting its own joint audits, and it’s possible that smaller groups of states would enter into joint auditing agreements.

The default is to do audits exactly as they’ve been done, Riehl said, adding that this would create a “Wild West” atmosphere in which businesses might face audits from thousands of local tax jurisdictions. She said the federal legislation at least contemplates a single-audit approach on a statewide basis, but even this remains the subject of disagreement between state and local governments. “And that’s precisely why this hot potato has been passed down the line this entire time to deal with later,” she added.

“With the rules of engagement still up in the air, it’s not surprising that the audit framework is still a question,” Riehl said. “It’s a very important feature of the Marketplace Fairness Act, and it’s good to know that congressional staff are looking for input on this. But even if, in the end, the Marketplace Fairness Act punts this to the states, there has to be some addressing of what’s done in the case of multistate audits.”

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