Avalara Webinar: “Managing Sales Tax Exemptions in an Audit-Happy World”

“Dealing with “certs” can be a nightmare.”

“Managing Sales Tax Exemptions in an Audit-Happy World” is the title of an upcoming webinar by Avalara, one of the 6 CSPs for the streamlined states.
Yes, by all means.  Pass MFA so ALL remote resellers (including manufacturers) will suddenly be faced with audits from up to 45 more states than they used to.

Again with the interesting messaging.  To retailers/manufacturers… the truth about the challenges of compliance.   When promoting the Marketplace Fairness Act?  It’s going to be all fine…

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.”

Personal Liability for Corporate/LLC Sales & Use Taxes – A Reminder

As a lovely reminder of how scary the audit risks are if the Marketplace Fairness Act passed,  I received a reminder of it in the mail today from the California State Board of Equalization (BOE).  Standard form BOE-162.

——————————————————————————————————————————————–

IMPORTANT NOTICE

Personal Liability for Corporate and Limited Liability Company Sales and Use Taxes

Did you know as a corporate director, officer, member, manager, or other person having control or supervision of the filing of returns or payments of taxes, you may become personally liable for any unpaid sales and use taxes, interest, and penalties?

Section 6829 of the Revenue and Taxation code provides that the State BOE may pursue collection action against certain corporate or limited liability company personnel for any unpaid corporate sales and use tax liability.

——————————————————————————————————————————————-

One state is bad enough.  The risks of mistakes suddenly  ramping up from 1 state to potentially 46 states is very scary.

UPDATE: In this case, the primary issue for me is our exposure going from 1 to 46 states, not the personal responsibility part of it so much.  This notice and the part of CA law it references is primarily (but not entirely) aimed at bad guys.  As I’m not a bad guy (unless you’re pro-MFA, then opinion might be different),  so it isn’t a big deal to me.  But I don’t know what the laws are for the 45 other taxing states.  When can they “pierce the corporate veil”?

House Judiciary Committee Releases Principles on Internet Sales Tax 9-18-2013

Fortunately/Unfortunately, the Marketplace Fairness Act doesn’t meet any of the Judiciary committee’s principles on what would constitute an acceptable legislative approach to Internet sales tax.

 

http://judiciary.house.gov/news/2013/09182013.html

 

House Judiciary Committee Releases Principles on Internet Sales Tax

Washington, D.C. – Today the House Judiciary Committee released basic principles pertaining to the issue of Internet sales tax. To develop these principles, the Committee received input directly from taxpayers, industry and trade groups, and representatives of state and local governments. The principles are intended to guide discussion on this issue and spark creative solutions. Chairman Bob Goodlatte (R-Va.) and Subcommittee on Regulatory Reform, Commercial and Antitrust Law Chairman Spencer Bachus (R-Ala.) issued the following statements.

Chairman Goodlatte: “Americans across the country are affected by the issue of Internet sales tax whether they are consumers or business owners. The aim of the principles is to provide a starting point for discussion in the House of Representatives. I greatly look forward to hearing fresh approaches to this issue and continuing the discussion.”

Subcommittee Chairman Bachus: “The principles issued by Chairman Goodlatte provide a thoughtful framework for discussion on the Internet sales tax issue. As chair of the subcommittee with jurisdiction over Internet tax issues, I appreciate that the Chairman is giving it serious consideration.”

Basic Principles on Remote Sales Tax

1. Tax Relief – Using the Internet should not create new or discriminatory taxes not faced in the offline world. Nor should any fresh precedent be created for other areas of interstate taxation by States.

2. Tech Neutrality – Brick & Mortar, Exclusively Online, and Brick & Click businesses should all be on equal footing. The sales tax compliance burden on online Internet sellers should not be less, but neither should it be greater than that on similarly situated offline businesses.

3. No Regulation Without Representation – Those who would bear state taxation, regulation and compliance burdens should have direct recourse to protest unfair, unwise or discriminatory rates and enforcement.

4. Simplicity – Governments should not stifle businesses by shifting onerous compliance requirements onto them; laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.

5. Tax Competition – Governments should be encouraged to compete with one another to keep tax rates low and American businesses should not be disadvantaged vis-a-vis their foreign competitors.

6. States’ Rights – States should be sovereign within their physical boundaries. In addition, the federal government should not mandate that States impose any sales tax compliance burdens.

7. Privacy Rights – Sensitive customer data must be protected.

You’re going to feel a little “pressure” – Audit Pain Mistatements (Taxcloud)

Ever heard that little white lie at the dentist or doctor’s office?  That’s their euphemism for extreme pain.  When a doctor uses that phrase, you know it’s going to hurt soon.

I now have a new equivalent:  “post-modernization audit.”

Fedtax/Taxcloud is at it again, spouting absolute nonsense regarding the risks and pains of an audit in discussion comments.  Kevin Hickey had written a piece about classification issues they had in an audit in their home state of Pennsylvania.  It was brutal, time consuming and ended up leading to a $25,000 fine due to confusing interpretations and classification issues.

TaxCloud chimed in:  “Ultimately, the situation described is a business affected by historic laws, not laws envisioned and enabled by the proposed federal legislation. Indeed, resolution of the writer’s concerns are the exact purpose of the bill.”

Which of course, is nonsense, and diregards completely the reality of his story and our legitimate concerns if the Marketplace Fairness Act passes.

The MFA is the CAUSE of the increased audit risk for a smaller business and are absolutely not the exact purpose of the bill.  How does letting 45 more states audit you make things better? A 4500% increase in audits and more importantly, the liability of audits is the worst part of the Marketplace Fairness Act. To say the purpose of the bill is to resolve this is Orwellian double-speak, just like the name of the bill.

Then, the funnier/worse part.  “thus in no way possible an accurate description of a post-modernization audit.”

Ahh.. See somehow audits will get better in the future if The Marketplace Fairness Act passes.  And we’ll be flying jet packs in the future too.

Auditors behavior will not change.  Items will still need to be poured over, invoices, tax returns, the whole shebang.    Except that you can be audited by 45 more states instead of 1.  A fatal flaw in the MFA and one that is not fixable.

And with all due respect to TaxCloud, how would they know?

  • Taxcloud has only been around for a few years
  • Taxcloud has a fairly small number of clients
  • Their experience is hardly a large enough sample size to really understand audit risks if MFA passes
  • Followup beyond any initial data a CSP could provide wouldn’t be in their understanding

My Wall Street Journal Opinion Piece – In August 8th Paper

I’m very excited to write about an opinion piece I wrote for the Wall Street Journal.  I’m thrilled that one of the most prestigious papers in the world is including my piece about the Marketplace Fairness Act in the August 8th 2013 Journal.

The piece is about the real-world impacts the Marketplace Fairness Act will have on my business and other similar businesses and it addresses the many myths the pro-MFA big box lobbyists and tax compliance companies are shoveling on a daily basis.

Shareable link – Good for 7 days.

 

Text of my opinion piece:

August 8, 2013

Calling Foul on the Marketplace Fairness Act

The cross-state sales tax legislation is a grave threat to online businesses like mine.

Proponents of the Marketplace Fairness Act—which would enable states to collect sales tax on Internet vendors—have had very little difficulty getting the word out about why this legislation should become law. Well-connected big-box retailers, venture-funded tax service companies and Amazon.com certainly have the budgets to run an excellent PR campaign for passage of this bill. Lost in this lobbying shuffle are a large number of businesses who will be severely hurt or even put out of business by this ill-conceived bill.

I’m the owner of Chefsresource.com, an online retailer of gourmet kitchen items for the past 14 years. We’re a family-run business with a fairly small number of core employees who handle all aspects of our online business. We’re located in California and collect sales tax for our California shipments.

The biggest concerns I have are about compliance costs and the audit possibilities under the MFA. Right now, I am in the middle of my second California sales-tax audit. Even under the best of circumstances, audits are stressful, invasive, time consuming and costly. A good auditor is thorough and just doing his job, but the hard expense of extra accounting assistance and, more important, the demands on my time are a real challenge and take away from my ability to grow my business. The MFA would require companies like mine to collect sales tax in states where we have no physical presence, opening us up to the risk of audit by as many as 45 sales-tax states each year.

I truly cannot see how our business could possibly handle audits by scores of different states and tax jurisdictions at any one time. Even a few audits per year would be more than we can handle, and the personal financial responsibility for any audit deficiencies is frightening to me. The only safe-harbor provision in the MFA is that companies would not be held responsible if an error is made by the government-certified software provided “free” under the proposed law.

But software glitches are only a small portion of the possible audit issues. For instance, how would this new remote auditing power be enforced? Will they come to my office like my local auditor does? Of course not. Will we be compelled to attend audits in different states? This is not addressed in the bill or directly addressed in the states’ simplification standards document.

The myth of free software solving everything is especially infuriating to business owners who actually understand the business processes involved. To quote McKane Davis, president of Scrapbook.com and one of the founders of eMainStreet Alliance, a grass-roots group of online small businesses opposed to the MFA: “The software is free like a puppy is free.” Every state is allowed to offer its own choice of software. The software might be custom-written by the state, or might be licensed from a tax-software provider. It’s not possible to integrate numerous, incompatible “free” solutions into our business. The only solution is to pay a provider.

Unfortunately, even paid solutions will not fully accommodate our fairly standard business requirements. There is far more to sales-tax collection than figuring out the correct amount due in the shopping cart. Avalara, a leading sales-tax compliance service can certainly handle that small aspect of the big picture. But they don’t currently work with our order-processing software, which handles phone orders, returns, sales-tax reports and more. Our Amazon sales cannot be handled through this paid service either. Amazon sales-tax collection would have to be handled through Amazon itself—for a fee of course.

The small-business exemption excluding companies with remote sales of less than $1 million sounds generous, but is far too low. Assuming 5% net margins, (Amazon’s is closer to 1%), that’s $50,000 a year in net profits. Compliance costs will wipe out a large chunk of those profits. The definition of “small” also will be a disincentive against growth; many people will shrink their businesses to avoid the issue or simply shut down.

Moreover, a much larger number of businesses will be affected by the MFA than is commonly known. Remote sellers under the act most visibly include online retailers and catalog sellers. But the act will also apply to remote vendors, manufacturers and distributors who supply retailers. Many of our suppliers, for example, would not qualify for the small-business exemption and will face the same 45-state audit risk we do. Some of our suppliers also sell direct to consumers. They will be hit in the same way all remote retailers will. Their costs will need to be passed on, which will likely lead to higher wholesale and retail prices.

I strongly support the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota that no state may require retailers to collect sales taxes from online buyers unless the retailer has a physical presence in the taxing state. Physical location is the key and any attempt by other states to pass their tax-collection burden onto me is a grave threat to my business. The MFA is flawed legislation that doesn’t bring true simplification to the process.

The MFA impact on Manufacturers, Distributors & Wholesalers – A Huge Swath of the Economy Will Be Affected (Updated)

Update at bottom 7/31/13 – Confirmed by meeting notes of Streamlined tax board.

Executive Summary:
Remote sellers under the Marketplace Fairness Act (MFA) most visibly include online retailers and catalog sellers.  However, the MFA will also impact the vendors/manufacturers/distributors who sell to these retailers as well, regardless if the manufacturers sell direct to consumers.  The MFA will impact a much larger group of companies than previously thought and across all industries.  Manufacturers and wholesalers have always dealt with their own state where they have nexus, MFA will expand this dramatically.  These negative effects will be felt through virtually all areas of the economy.

 

Massive Impacts include:

  • Sales tax audits from up to 46 states in any year – Even if you have no presence in the state and do not sell direct to consumers.
  • Substantial initial compliance costs including IT upgrades and integration issues, personnel commitment and capital expenses
  • Significant ongoing expenses for service contacts, personnel costs and other compliance costs

 

Background:

The Marketplace Fairness Act (MFA) bill passed in the Senate and is commonly referred to as the Internet tax bill.  The bill is currently in the House of Representatives, in the Judiciary committee under consideration.  The bill would allow states to require remote sellers to collect sales tax on their behalf even if the company doesn’t have a presence in the state (called nexus).  This law would overturn all previous precedent which was confirmed in the 1992 Supreme Court’s Quill decision regarding a catalog company selling to North Dakota businesses.

 

Why does it affect you?

 

The MFA bill concerns “remote sellers”.  Remote sales don’t just mean Internet sales, but includes any sales across state lines.  Other examples include catalog orders, phone orders, and sales to retailer customers for resale.  The relevant sections of the MFA bill and SSUTA agreement:

 

S.743 or the MFA states in section 2 requires all sellers not qualifying for the small seller exemption to collect and remit sales and use taxes per the provisions of the Streamlines Sales and Use Tax Agreement (SSUTA).

In the most recent version of the SSUTA amended 5/12/12 a seller is defined on page 10, line 25: “A person making sales, leases or rental of personal property or service”

Section 317 – Administration of Exemptions (such as wholesalers/vendors/manufacturers selling to retailers) Line 17 – “The seller shall maintain proper records of exempt transactions and provide them to a member state when requested.”

The above line clearly shows that the wholesalers retailers purchase from are certainly considered sellers.

 

And really, this isn’t surprising.  Current sales tax rules do require exemption certificates to be filled out for a state that you’d have sales tax responsibility for (your home locations(s)).  There is an exemption certificate for the SSUTA for states to use.  MFA changes the game for the number of states suddenly involved.

 

How does the law affect you?  It depends if you also sell retail to remote consumers.

 

Scenario 1: Manufacturer/wholesaler sells to retailers and sells direct to Consumers. – Full brunt of MFA applies.

 

These companies will be impacted exactly the same as any other retailer under the MFA.  They will suddenly have the same compliance and audit burdens as any other retailer would, with all the states.  Before the MFA, the manufacturers only had to worry about states they had nexus in for collection of sales taxes to end users and managing exemption forms for their wholesale retail customers that are in the same state(s).

 

Some of the Sales Tax Compliance Headaches Ahead – Hard Costs

  • Extensive initial commitments of personnel time
  • Installation/configuration of tax computation software or service  -IF your various touch points are supported by the vendor.
  • Possible Software upgrades
  • Initial fixed expense and annual yearly expenses to collect and remit tax for up to 46 states
  • Submitting monthly reports and collections to up to 46 states
  • “Free software by the states” – A myth.  All states can pick their own and it won’t work with your systems.  45 different versions certainly won’t.  So you’ll have to sign up with a paid service

 

Some of the Sales Tax Compliance Headaches Ahead

  • Audits from up to 46 states – Even if you have no physical presence or representation
  • Up to 46 audits in any given year.  Even 1 state every 10 years is almost 5 per year, every year!
  • New Compliance Demands – Exemption certificates better be on file!  You will be audited.
  • State tax board communications – The burden of responding to all state inquires is substantial when multiplied 4500%.

 

Scenario 2: Manufacturer/wholesaler doesn’t sell direct in any way to consumers, only retailers.  Audit risk jumps up to 4500% – Audits from 46 states.

 

True-wholesale companies that only sell to retailers will also be impacted by the MFA.  They are still sellers.  As it is now, these manufacturers already do report to their home state’s sales tax board, but they would require exemption certificates to be on file from their retailers, certifying the product was for resale and that sales tax did not need to be collected.  Their home state can audit them and probably does from time to time.  Under MFA, these manufacturers would now be subject to the same audit risks as retailers.  The manufacturers are still sellers of products to these states and will need to prove, on demand or audit, that their sales are properly exempt sales.  So even manufacturers who don’t sell at retail to end consumers, will need to respond to and can be audited by all other states to ensure transactions are properly exempt.

 

Some of the Sales Tax Compliance Headaches Ahead

  • Audits from up to 46 states – Even if you have no physical presence or representation
  • Up to 46 audits in any given year.  Even 1 state every 10 years is almost 5 per year, every year!
  • New Compliance Demands – Exemption certificates better be on file!  You will be audited.
  • State tax board communications – The burden of responding to all state inquires is substantial when multiplied 4500%.

 

Recommended Actions – Take Action Now!

Let them know how this will harm your business

 

  • Contact the House Representative for your business

http://www.house.gov/representatives/find/

  • Contact your personal Representative (if a different district)
  • Contact the members of the House judiciary committee

http://judiciary.house.gov/about/members.html

  • Contact your state’s governor (major supporters of MFA)
  • Contact your local chamber of commerce (also supporters of MFA)
  • Contact your state’s chamber of commerce
  • Work with other trade groups or associations in your industry
  • Let others know!  Sound the alarm!
  • Contact local and regional media

 

Update 7/31/13: Streamlined Tax Governing Board March 18th 2013 Notes Confirm – Taxable and Nontaxable count towards small seller exemption. Wholesalers, distributors and manufacturers will ALSO be affected, even if they don’t sell direct to consumers and don’t collect sales tax. Certainly a drag on all sectors of the retail economy if implemented:

Notes regarding their Federal Implementation Workgroup Call from March 2013: They specifically talk about if non-taxable counts towards remote sales for the small seller exemption, and they concur they do.

“MFASection 2(c) –Updates
Small Seller Exception Threshold
There were questions received after the last implementation meeting regarding whether non‐taxable sales are included in determining the threshold. Mr.Jennrich said generally it appears that it would include both taxable and non‐taxable sales based on the language, a reading consistent with discussions at the prior Implementation Workgroup meeting”

Meeting notes from their site

MFA Myth: Audit Protections

The Marketplace Fairness Coalition has been repeatedly misleading with its claims of audit protection in the Marketplace Fairness Act (MFA), yet their response has not addressed the actual audit concerns at all.  Their non-response to the audit concern?

“Beyond that, this false claim ignores the language of
the bill.  As we noted above, this legislation requires states to provide sellers
with free software that calculates the sales tax due at the time of filing and
files sales tax returns.  And, the bill also specifically limits the liability of
sellers using the state-provided software”

The software has nothing to do with this.  Limiting the liability has nothing to do with audit concern.  The only safe harbor protection offered in the MFA is if the state’s software makes an error, the seller wouldn’t be responsible for that error.  This small bread crumb has nothing to do with the overall nightmare audit possibilities.

Most small online sellers do not have multiple locations and have nexus in 1 state.  They would pay sales tax to shipments within their home state.  They are subject to sales tax collection audits from their home state.  1 State only.

If the MFA passes, remote sellers will be subject to audit by all 46 sales-tax states! A 4500% Increase!

The MFA specifically authorizes audit capability in section 2A, allowing one agency per state “a single audit of a remote seller for all State and local taxing jurisdictions within that State”.  Simplified to one audit per state, pretty weak simplication!

Audits are very time consuming processes that take away limited time from actually trying to run the business.    So now imagine trying to handle 1-46 audits per year.  Even if a state only decides to audit a business once every 10 years, you’ve now gone from 1 audit every 10 years or so in your home state, to an average of about 5 audits EVERY YEAR.  This is clearly an impossible burden for small businesses to handle.

Personal Liability for any sales tax liability!

Business owners have always been personally responsible (if necessary) for sales tax liabilities.  Even if the company is a corporation or LLC, state sales tax agencies are able to pierce the corporate veil and hold the owners personally responsible.  Why on Earth would a small business owner want to take on that personal risk, now multiplied by 45x?

States hungry for sales tax revenues will aggressively pursue these new revenue sources!

Do only bad guys get audited?  Of course not.  Any business can expect sales tax audit(s) at some point in their existence.  A leading sales tax service provider Avalara has a few thoughts in their white paper about audits:

  • “Some businesses mistakenly believe that if they don’t make major mistakes they will not be audited. That is incorrect. Audits are often prompted by external causes, such as revenue shortfalls or changing tax rules.  States are becoming increasingly aggressive in auditing businesses”
  • “To make up this lost revenue, many states are increasing audit activity to recoup lost use tax”

Can remote states compel the company to appear in their offices?  Probably.  Maybe.  Not sure.

Another huge problem with the audit nightmare in the MFA is remote audits.  Normally, sales tax audits are done in person, with a state employee from the closest regional sales tax audit sets up the meetings and working on site.  So what happens if California audits a Texas business?  Or Vice-versa?  The remote state certainly won’t be flying its CPAs around the country and putting them up in hotels for weeks at a time for a remote audit of a small business.  So what will happen? (And by the way, each of the states will have completely different laws regarding their audits, which we would be bound by).

We’re actually  not sure.  Nothing in the Marketplace Fairness Act covers this.  And the Streamlined Sales and Use Tax Agreement (SSUTA) that governs the “simplified” taxation doesn’t cover it.  Our best guess is that it would vary from state to state, but again, a reason why the MFA is an unreasonable burden on businesses who have no physical presence in their state.  No representation.  No voting rights.

In short, the audit possibilities of the MFA may be the most damaging part of this entire flawed legislation.  There is zero doubt that the audit demands alone will force some out of business and will chase other owners out of their business to avoid the nightmare this bill will introduce.  Quite simply, the bill is so flawed it is not fixable.