Use Tax Education For More Revenue – A Natural First Step? Not for Utah

From the sounds of the shrieks coming from the states regarding use tax and the necessity of a law like the Marketplace Fairness Act (MFA), you’d think that the states have done everything possible to collect their “missing” revenue.  The states have thrown around unrealistic (and frankly nonsense) numbers about how much sales tax/use tax revenue they’re losing due to the Internet and other remote retailers.  Actual sales tax/use tax revenue for the states has actually been doing fine, as shown repeatedly in this blog with hard data examples from various states’ own department of revenue’s figure on sales tax collection.

I’ve stated all along that the natural, first logical step would be for states to collect the money from their own residents.  The terrible overreach that is MFA and other similar bills isn’t required at all if states just bother to do their jobs.  IF the revenue being lost is actually anywhere near what they claim, they’d be stupid not to spend money to try and capture some of that “lost” tax revenue.  Plus, their return on their investment (ROI) should be great.  Economically, it makes zero sense for them NOT to spend money trying to collect if they believe it will bring in more money than it costs.

So I began my quest with the state of Utah for a few reasons: Representative Jason Chaffetz has tried to gather support for his version of the MFA (RTPA, covered throughout the blog), Utah is a key state trying to pass unconstitutional state laws requiring tax collection from remote retailers AND Utah seems to be a leading state in complaining about the problem.  So are they a leading state on doing something about the problem?  Or are they just a whiner?  I think you can guess the answer.

I reached Jeff Christiansen, the Assistant Director, Taxpayer Services Division, Utah State Tax Commision and asked what Utah is doing to educate Utah taxpayers on their use tax obligations.

The short answer is Utah is doing nothing.

To paraphrase, there’s a line item on some of their tax forms and if you download/have access to the printed instructions for the form it mentions use tax.  If you’re audited, use taxes would be covered there.  So nothing.

My followup question was on how much money is budgeted/spent on educating Utah state residents regarding their use tax obligations, since Utah claims it’s a huge amount of revenue they’re missing out on.

Zero.  Not applicable.

“I am not aware of the Tax Commission having any type of budget to proactively pursue consumer education using the methods you have described…such as ad campaigns, TV spots, radio and paper advertising etc.  Therefore, approaching your question number 3 from an advertising perspective – “How much does Utah spend on these efforts (if applicable)?” –  the answer would be it is currently “not applicable”.”

So Utah is spending ZERO dollars on trying to collect their state tax from their own citizens but is more than happy to foist massive actual hard costs and ongoing administrative costs on all the online retailers that would be affected by the MFA.

Utah: Get back to me after you’ve tried to do your job… then we can talk about unprecedented and intrusive national legislation that lets states reach across their borders to enforce their state laws.  Not until then.

The Remote Transaction Parity Act Won’t Touch These Foreign Sellers

The Remote Transactions Parity Act (RTPA) and the Marketplace Fairness Act have a gaping hole that will continue to taken of advantage of even if either bill passes.  Combine this with subsidized inexpensive shipping for the “developing country” of China – means that China will continue to ship direct to the US at prices no one else can touch.

Here’s an actual example of what I mean: A $1.39 stereo jack cable for plugging my Ipod into a small speaker.  This item was purchased on Amazon from a third party seller that ships direct from China.  $1.39 and with FREE SHIPPING.  There’s also no sales tax charged since they are a foreign seller.  And as extra frosting, they declare the item was a gift, not a commercial shipment.

china-1w china-2w

The massive big box retailer funded RTPA/MFA push will foist compliance burdens on millions of small remote and marketplace sellers yet leave foreign sellers completely untouched.  Despicably, Wal-mart (and others) funded lobbying organization Stand with Main Street and the related lobbying fronts actually have the nerve to suggest that Alibaba will crush us if we don’t pass the MFA or RTPA.  In fact, any of the foreign sellers through Alibaba will be out of the reach of the law anyway and will NOT collect tax.

 

Remote Transactions Parity Act – HUGE Small Business Exemption Change – Much Worse than MFA!

To recap, the Remote Transactions Parity Act (RTPA) is the Marketplace Fairness Act (MFA) 1.1.  Same fundamental flawed and broken structure.  But now I think the RTPA is actually much worse than the MFA.

The RTPA has a Small Business Exemption (SBE), as does the MFA.  But new verbiage introduced since a March draft I saw completely destroys the SBE for a TON of businesses.

Inexplicably, the new paragraph states that you are treated the same as a business that exceeds $10 million in sales and can’t be exempt from the law if your company “utilizes an electronic marketplace for the purpose of making products or services available for sale to the public”.

This is INSANE!

So some small company who also happens to list some products on Ebay,  Amazon or Etsy now no longer qualifies for any small business exemption, no matter how small they are and will be required to bear the full regulatory burden of the RTPA 180 days after passage.  Just because they list through a marketplace.  And really, what does that newly added definition even mean in the real world?  Yes, it’s defined, but it’s a bit vague.

This is a TERRIBLE last minute addition to the bill that will dramatically affect the number of affected retailers, enrich CSPs and wipe out some smaller retailers.  I can’t believe that this hugely impactful section wasn’t in the March bill draft and has now been added as almost an afterthought.

 

” (3) ELECTRONIC MARKETPLACE.—The term ‘‘electronic marketplace’’ means a digital marketing
platform where—(A) products or services are offered for
sale by more than 1 remote seller; and (B) buyers may purchase such products or
services through a common system of financial transaction processing.”

 

In the end, RTPA will get rid of the Small Business Exemption after 3 years, leaving a huge windfall for the CSPs to touch literally every business in America.

Seattle Times editorial complaining about Speaker Boehner & MFA

“Editorial: If John Boehner kills the Marketplace Fairness Act, it would hurt Washington state”

“U.S. House Speaker John Boehner’spromise this week to kill the Marketplace Fairness Act is a kick in the gut to Washington state.

The measure would empower all states to collect sales taxes for online transactions from residents who make purchases from out-of-state companies.”

False.  Washington already has the ability to collect use tax from its citizens.  A new law is not needed.  Political will is needed.  If you want the money that badly, make the unpopular choice: educate and enforce existing use tax laws.

“Here in Washington, state revenue officials estimate the act would funnel $217 million in new revenue for local municipalities and $478 million for the state in the 2015-2017 biennium. The $695 million total would rise to $889 million by 2019-2021.”

Unlikely.  States cling to these inflated numbers from years ago that have been shown to have been wildly overstated.

“This additional revenue is important for a state that doesn’t levy an income tax and relies predominantly on retail sales, property and business and occupation taxes for its funding.”

Feel free to change that flawed option on your citizens if it’s not serving your state’s needs.  More importantly, Washington DOR taxable sales reports show strong growth in sales tax revenue, from 5% to 7%.  Is it ever enough?

Q2 2014 30,973,320,923 almost 7% growth year over year – most recent figure available
Q2 2013 $29,025,169,986

2013 annual 117,200,523,189 More than 7% growth over 2012
2012 annual 109,053,732,448 More than 5% growth over 2011
2011 annual 103,740,825,097

“But Boehner has consistently expressed concerns about the bill, aligning himself with the anti-tax fervor that has increasingly transfixed congressional Republicans.”

No, he’s thoughtfully holding off on the MFA.  Why do supporters need to pull circus stunts like trying to attach the legislation to other popular legislation? Or trying to cram it through in a lame duck session? It’s because the Marketplace Fairness Act is deeply flawed legislation that according to Taxcloud (1/6 certified tax providers if the MFA passes) could ensnare up to 3.5 million retailers in compliance costs and audit risks from 45 more states.

And why have proponents not done anything in the last 13 months since the House Judiciary came out with its principles regarding what would constitute a fair and balanced approach? Proponents don’t care. Most of the money is coming from big box retailers who would be happy to wound or crush smaller online rivals with this bill.

How about focusing on fixing the very real and serious flaws in the MFA. Then maybe you wouldn’t have to pull legislative stunts to try and pass it.

 

Pinned Post – MFA’s (AKA MITFA) Vast Impact

A couple of our blog post that summarize the vast, and perhaps unintended reach of the Marketplace Fairness Act on businesses.

First, a post about how wholesalers, manufacturers and other non-retailers will be affected by new compliance burdens and audit risks (and if they sell retail, they’ll be just as affected as us)

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

Second, a post regarding Taxcloud’s statement regarding the number of businesses that will be impacted by this legislation – It’s a HUGE number and way more than the proponents have tried to sell in the past.  Ridiculous numbers like 1000 retailers.

Taxcloud is 1 of 6 Certified Service Providers for the Streamlined States and a huge proponent of the bill, since they’d make many millions of dollars if MITFA or Marketplace Fairness Act passed.

Taxcloud Video – Up to 3.5 Million Retailers Will Be Impacted by MFA/MITFA

Taxcloud Video – Up to 3.5 Million Retailers Will Be Impacted by MFA/MITFA

How many businesses might be ensnared by the Marketplace Fairness Act/MITFA?  Way more than most might guess.

350,000 – 3,500,000 retailers is their market – according to this elevator pitch 90 second video regarding Taxcloud’s business prospects from October 2011.  Taxcloud is 1 of 6 certified service providers (CSPs) who will see a windfall in new business if the MFA/MITFA passes.

Actually the phrase was “350,000 to 3.5 million retailers will be impacted by the new law”.  And “suggesting an opportunity of 1.3 billion dollars for Fedtax.”

They’re embarrassed enough by this FAIR USE 19 second snippet of the whole video that they’ve repeatedly filed frivolous DMCA notices to pull down the video.  This copy is in Iceland – good luck with taking this one down.  Transcript down below too.

US Vimeo – back up.

 

I doubt this includes true wholesaler/manufacturers as someone who only has exempt transactions wouldn’t be someone that would generate revenues for them.  More businesses might be impacted even than this number.  Not sure if this estimate includes a $1 million dollar small business exemption or a lower one – or a much lower one like the pro-side plans on moving to anyway down the road.  Boil the frog slowly!

So is it puffery?  The real truth about how many would be impacted by the Marketplace Fairness Act’s unprecedented expansion of states powers to reach across their borders?  Somewhere in-between?   I hope not to find out.

Proponents have tried to soft pedal with completely unbelievably small numbers how many will be affected by the Marketplace Fairness Act.   I believe these numbers have embarrassed the pro-side and they’re freaking out.  Sadly, I do believe the numbers.

 

Taxcloud Pitch – UPDATE: TAXCLOUD PULLED THE VIDEO (10/25/14).  I’ll get a copy up soon and the transcript is below.

Update 2: 11/1/2014 – Taxcloud filed a DMCA takedown notice against the video.  I hope to have it up very shortly and won’t be silenced by the attempts. Transcript below anyway.

Update 3: 11/1/2014 – Created new video – Less than 20 second excerpt of the video that specifically leads up to the topic and states the number.  This video is absolutely covered by fair use.  §512(f) provides very severe penalties for those who knowingly file false DMCA notices. See also Open Policy Group v. Diebold.

Update 4: 11/2/14 – and of course, Fedtax/Taxcloud again failed a DMCA claim, clearly frivolous.

 

Addendum: transcript of the whole video

David: You would have to be living under a rock to not have noticed the state of California dispute with Amazon.com about collecting sales tax on online purchases and the fight is underway in other states as well.

Daniela: And this fight is underway in other states as well even in Connecticut and the numbers add up quickly over 23 billion dollars.

Joan: Over 23 billion dollars uncollected every year. Online retailers don’t collect sales tax today because 44 years ago the Supreme Court said it was too difficult.

Carl: Too difficult for remote retailers then mailer catalogs to keep track of every jurisdiction across the country.

Erin: No one would disagree that a lot has changed since then. That’s where Tax Cloud comes in.

Leslie: TaxCloud calculates sales tax for every address.

Paul: Every address across the country in under 13 milliseconds. And we also prepare and submit returns, submit proceeds and even…

Chris: Even respond to audits. And we do all of this for free.

Erin: Free.

Joan: Free.

Chris: We can offer TaxCloud for free for two reasons. One, we are paid by the states to provide the service and two, we have an extremely low operating cost made possible by our cloud computing infrastructure.

David: Now the fight in California has moved to Washington, DC.

Paul: Federal legislation has been introduced that would compel online retailers to collect sales tax.

Joan: Just like local retailers have to do. Between 350,000….

Daniela: … and 3.5 million retailers will be impacted by the new law suggesting in the annual opportunity of over 1.3 billion dollars for Fed Tax.

Other locations:

Also on Vimeo (now pulled via DMCA too)

Locally

When “free” isn’t free

Taxcloud finally did get around to supporting Yahoo carts, one of the top shopping carts used online.

Kind of.  And not exactly free.

It’s actually irrelevant to us at this point if they support it or not, as they don’t support the primary place anything related to sales tax actually occurs: our order processing software.  As mentioned before in other posts, the shopping cart is the mere tip of the iceberg of actual business processes that relate to sales tax.  Processing orders, changing prices, returning all or some of an order…

They worked with a third party developer to help, but the third party does charge a monthly fee for the integration.

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…

3.5 Million Remote Retailers? – The MFA Trojan Horse

In a public summary to potential investors, Fedtax/Taxcloud reveals some pretty interesting details about the business of being a CSP and the business they think it can be.

“We expect a tidal wave of new business once federal legislation passes, as merchants and e-commerce platforms alike look for the best way to comply with new sales tax guidelines”

“To best reach our market of approximately 3.5 million remote retailers”

3.5 million remote retailers?  The truth comes out, or perhaps a huge estimate for an audience of potential investors?  I can only guess that this is based on no small business exemption.  I do believe Taxcloud would be in favor of signing up lemonade stands if they sold remotely.  No idea on the methodology used for this market number.

It’s refreshing, but completely counter to the Pro-Marketplace Fairness Act supporter’s numbers.  Some have put the number as affected retailers as under 1000 (which was laughable).  An independent study puts it more like 30,000 in 2008.

So is the MFA, as-pitched, just the Trojan horse of shrinking or eliminating the small business exemption?  Maybe.  If it were up to the states and tax companies – it sure would be.

Time to sound the alarm to ALL small businesses who in any way sell remotely.  You are ALL part of the “market”.  Don’t think you’re OK because of the current small business exemption in the legislation.  There are active talks about lowering or removing it.  You will have to deal with all the audit risks, headaches, integration issues…. too!

 

States pay CSPs – We get nothing

If the Marketplace Fairness Act passes, remote retailers will have a variety of integration issues (if support for their platform even exists) and costs.  Personnel costs in time and salary, CSP fees (for most) and even paying for the credit card fees on the newly collected sales tax.   As covered in a previous blog post, remote retailers will pay around $2,000 per year, per million in sales.  So we become unpaid state tax collectors, with all of the compliance burdens and no reimbursements for our costs.  Big-box retailers (like those sponsoring the MFA) can usually get some reimbursements from the states.  But we’re not Wal-mart.

Who does get paid by the SSUTA states?  The Certified Solution Providers (CSPs).  And a lot.

The CSP compensation schedule is per merchant, not total.  So most retailers will be in the top-2 tiers of reimbursement.

  • 8% – up to about $3.5 million in sales on average
  • 7% for the amounts above $3.5 million to $14.5 million.

Sample figures for a hypothetical retailer with 7% sales tax average.

$1 million in sales – $70,000 in collected tax.   CSP gets $5600 per year.    Retailer stuck with $2000 in CC fees alone.

$3 million in sales – $210,000 in collected tax.  CSP gets $16,800 per year.  Retailer stuck with $6000 in CC fees alone.

$5 million in sales – $350,000 in collected tax.  CSP gets $27,000 per year.  Retailer stuck with $10,000 in CC fees alone.

Thanks for nothing.

The Streamlined states group have batted around reimbursing retailers for costs incurred but have done nothing.   There’s room in the SSUTA values to compensate retailers, but we’re not at their meetings and don’t have the cozy relationship CSPs do.