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.

Remote Transactions Parity Act (RTPA) – Will harm literally EVERY business in America

This is no hyperbole.  The RTPA will touch and harm every single business in America and allow 46 states to exert power over them even if they’re a tiny company in only 1 state.  To say this is an unprecedented overreach doesn’t begin to cover it.

This bill was essentially written by the Tax Certified Solutions Providers (related article here) and is crony capitalism at its worst.  The RTPA had a last minute addition to the March draft that I saw removed the Small Business Exemption (SBE) for any seller who sells through a “Marketplace”.  This is probably a huge percentage of online sellers.  Some prominent examples:

  • Amazon
  • Ebay
  • Etsy

So if you sell ANYTHING at all, any sales volume through a marketplace, no SBE for you!  Yes, channeling the Soup Nazi.

What I didn’t catch, is that after the standard SBE drops to $1 million in sales (not remote sales, any sales), it drops to zero anyway after 3 years of passing.

So every single business in America, regardless of how small they are or if they even sell across state lines, will be impacted by the RTPA.  This doesn’t just affect anyone who sells online, it affects everyone.

  • All of the compliance costs
  • All of the audit risks
  • All of the time wasted
  • All of the money flowing into CSP’s pockets
  • Even if you’re a 1 person company in 1 state.

 

This is a tax on every business in America.  It must be stopped!

 

And I guess it was hyperbole – 7 or 8 businesses will do very well if this horrific bill passes.  But we can’t all be the CSPs who basically wrote this bill.

The Remote Transaction Parity Act Won’t Touch These Foreign Sellers – Part 2

Shortly after I wrote The Remote Transaction Parity Act Won’t Touch These Foreign Sellersthere was an article in the Wall Street Journal entitled “Borders Matter Less and Less in E-Commerce” which is an excellent example of the very problem MFA and RTPA won’t address, while hammering U.S. small businesses with compliance costs and audit risks.

“E-commerce made it a breeze for a shopper to buy something from the other side of the country. Now, retailers and delivery companies are making it just as easy for shoppers to buy something on the other side of the world.

Blogger Shannyn Allan recently saw a $70-plus faux stone necklace in a boutique near her home in Chicago. She snapped a photo, ran it through Google Image and found a website where she could get the same one for $16 with approximately $7 added for shipping. It arrived on her doorstep about three weeks later—three weeks, because it was coming from China.”

Guess which product and retailer won’t be collecting tax – The Chinese seller.  

What sales tax scheme actually would enforce the tax?  States enforcing their already existing use tax laws on the books.  Spend some money that would be paying the CSPs and educate your own state residents, audit and enforce existing laws.

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.

Marketplace Fairness Act Myth: “Level Playing Field”

One of the focus group-tested themes by the pro-Marketplace Fairness Act groups is that they are pushing for a “level playing field”.  How noble of Wal-mart, Best Buy, Amazon and others to push for small businesses to be on a level playing field.   Which of course, is nonsense on many levels.

Why Efairness/MFA undeniably won’t create a level playing field:

  •  $1 Million Small Business Exemption – there will always be a steady stream of smaller retailers with products for sale without tax.
  • Cheaters – Many people selling through Amazon or Ebay that should collect sales tax don’t.  This won’t change.
  • Foreign Sellers – Will not be bound by the MFA.  I’m seeing more foreign sellers through Amazon than ever, especially from Japan & China.
  •  “99% of businesses won’t be affected by MFA”   What’s so funny is the cognitive dissonance of proponents who try and minimize the impact of the MFA on businesses.    If actually true, it means only 1% of the stores would start collecting sales tax, so that won’t help “Main Street” businesses at all.

The flip side of a level playing field is the tired argument that MFA would equalize online and brick and mortar retailers.  Phrases like “online-only sellers should collect sales tax from dollar 1, just like he must”.  Again, nonsense.

  • Online retailers do collect sales tax “from dollar 1” where they have a physical presence, just like traditional retailers.
  • MFA would bury smaller online retailers under a blizzard of audits and collection burdens that don’t exist offline
  • Can a small brick and mortar face audits and compliance costs for 46 states?  No.
  • Can a small brick and mortar be an unpaid tax collector for 46 states?  No.

So get over this rubbish that the Marketplace Fairness Act has anything to do with fairness.  It absolutely doesn’t.  Nor do Wal-mart and the other supporters care.  It’s just the shameless talking points to evoke an emotional response to an issue, to paper over horribly designed legislation that won’t actually do anything for fairness anyway.

UPDATE: Part 2 covers why the MFA is even LESS able to creae a level playing field.  Only 33% of the population lives in streamlined states that will be affected by MFA.  2/3 of the US doesn’t.

 

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

21st Century Retail 2014 “Poll” – Big Lies

Either way, the stats are meaningless.  21st Century Retail group, AKA International Council of Shopping Centers.  And like my post last year on their press release “poll” there are zero details about the actual questions or methodology – and that’s by design.  The company they use allows the questions and methodology to be kept secret as part of their package, as covered in last year’s post.  You can craft poll questions to get almost any desired results.  REAL polls share the actual questions and methods used in polling.

Here’s the part where they are flat out lying.

From their release:  The poll also found that 82% of Americans think collecting sales tax from online-only vendors at the time of purchase is easier, up by four percentage points since 2013 (78%) and seven percentage points in 2012 (75%).

Except that’s not the numbers they’ve published in previous press releases, each linked to below:

  • October 2012: “86% of consumers feel it would be easier to pay sales tax on online purchases at the point-of-purchase rather than at the end-of-the-year on their tax forms, as is the current system.”
  • October 2013: “78% of voters feel it would be easier to pay state sales or use tax on online purchases at the time-of-purchase rather than through special forms or when they file their income taxes”
  • September 2014: “The poll also found that 82% of Americans think collecting sales tax from online-only vendors at the time of purchase is easier, up by four percentage points since 2013 (78%) and seven percentage points in 2012 (75%)” – Which of course is false.

Deja vu?  Rewriting history are they?  Is this 1984?   Their 2014 comments are false.  I might word that statistic a little differently:

“Poll finds 4% fewer Americans think collecting sales tax from online-only vendors is easier as compared to 2 years ago”

These PR groups and big-box retail funded special interests will say and do anything to pass this flawed legislation.  And why does the criteria seem to jump from consumers, to voters, to Americans?  Massaging the data?

 

Sten Wilson’s – Roanoke Times Rebuttal

Sten had something posted in the Roanoke Times, a VERY MFA-friendly paper.  Clearly, Sten had some editing help before, or by the paper’s editors because it was the least-rambling and random word salad I’ve seen from him.  Written clearly doesn’t mean it’s not full of falsehoods and half-truths, but it wasn’t as painful to read as his posts usually are.

 

Sten is as qualified to talk about the challenges we face as small ecommerce retailers as I am to talk about brain surgery.

Sten has no qualifications to speak of the destructive impact this flawed legislation will have on our business. He has a token website that only takes paypal, has probably virtually ZERO sales, has no other online sales channels and has admitted in a previous post a couple years ago his total revenue even including local and fair sales in person is less than $50k. He does not know what he’s talking about. The combination of actual hard costs and soft costs will cripple our business. The new audit risks will have me reconsider my business completely, and was the topic of my op-ed in the Wall Street Journal in August of 2013.

Instead of trying to foist the MFA on us, try actually addressing the problems covered by the House Judiciary committee regarding the legislation’s flaws. But instead, Wal-mart Womack and the others are trying to push through this big-box retail funded bill at all costs, truth be damned.

As far as Sten’s piece – way more polished than his usual copy and paste comments. Clearly edited by someone. David?

Let’s just cover a few of his comments in this piece.
“and continues to advocate for greater efficiencies for all retailers” – Thanks, we’re efficient at the moment. Having 45 more states to report to, be audited by and subjected to… doesn’t make us more efficient. Rarely does legislation make any business more efficient.

“Everyone seems to think that online sales tax collection is about large online companies, like Amazon, trying to crush small online businesses” – because it is. The main funding from these astroturf PR campaigns come from Wal-mart, Best Buy, Home Depot and other big box retailers.

“Just over two years ago” – the timing on when he started using Taxcloud is suspect, he’s been shilling for MFA and Taxcloud longer than that. He’s in a press release with Taxcloud more than 3 years ago.

“All of which leads me to the reason why I’m supporting the Marketplace Fairness Act, a bill that would grant states’ rights to require online sellers to collect sales tax, and hold them harmless for any errors that may occur.”

Layers of falsehoods in this statement. States already have the right to collect the unpaid use taxes from their own citizens and have not made a serious effort to try. It’s not politically popular. It’s more palatable to the states to make retailers across the country unpaid tax collectors for them instead.

re: hold them harmless for errors – utterly false, a lie. Retailers are fully responsible for errors, only a small safe harbor exists for a CSP’s software calculating incorrectly. Not covered: misclassified items, any other kinds of errors and even that safe harbor has significant limitations on who qualifies.

The “simplifications” are a farce, minor, token efforts at simplification at best.

 

Why you should be against the MFA – In Avalara’s own words

 Avalara is a venture-funded, leading provider of sales tax and compliance automation services and is a proponent of the Marketplace Fairness Act (MFA).  Here are Avalara’s own words on how burdensome and crushing sales tax compliance will be for remote sellers if the MFA passes.  The quotes are from their own publicly available white papers, but a large portion of the quotes are from their Sales Tax Survival Guide 2013.

 The MFA will introduce a crushing compliance burden on many small businesses

 “Considering the already impenetrable maze of sales tax collection rules, businesses face an uphill battle this year. Sales tax compliance in 2013 requires more resources and expertise than most small to midsized businesses possess.” [i]

 “Current state and federal proposals to change sales tax collection requirements on remote sellers such as online retailers add to an already difficult compliance environment for businesses.” [ii]

 “On average, sales tax compliance costs small and mid-sized businesses three to 15 cents per sales tax dollar collected. According to the U.S. Census Bureau, failure to account for that expense is one of the principal causes of small and mid-sized business failure in the United States. Why? The components of this compliance expense are difficult to pinpoint and often overlooked. The costs are hidden in staffing, compliance, accounting systems, information technology, and other business infrastructure.  In addition, sales tax compliance is a passthrough activity that adds no value to the bottom line. Sales tax collection requires you to act as an agent of each state in which you have nexus and collect and remit sales tax accurately. And if you don’t do it correctly, accurately and on time, your business can face heavy fines and penalties.” [iii]

 MFA will also impact catalogs, manufacturers, distributors & other remote sellers

 “What many businesses don’t realize, however, is that remote sellers such as distributors, manufacturers, and multi-level marketers might also be impacted” [iv]

 “Calling these laws “Amazon laws” is misleading since they apply to all remote sellers—defined as a businesses without significant physical presence in another state and that sells to customers using the Internet, mail order, or telephone. Cities, counties and states regularly change these rules, making sales tax compliance nearly impossible for most businesses” [v]

 “For easier accounting, a database or spreadsheet of exemption certificates should be easily accessible. The best solutions tie directly into your point-of-sale system, making it simple to verify that exemption certificates are current, valid and on file.” [vi]

 A customer quote from a manufacturer: “Our biggest audit hit was the exemption certificates and the no-tax sales.  So we decided to go with AvaTax Certs. We really feel strongly that it is going to be a good tool for us to help with audits, to reduce our liability with states, to reduce the frequency of state and multiple jurisdiction audits.” [vii]

 Audit Risks – Now for up to 45 states at once

 “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” [viii]

 “To make up this lost revenue, many states are increasing audit activity to recoup lost use tax.” [ix]

 “If a notice is received and that person is on vacation, no one is available to handle the

concern and respond quickly to the request for information or clarification from

the state. Delayed responses can place you at risk of being selected for an audit

and can expose you to possible penalties and fees for not resolving the notice.

 

The state can restrict your business activities and even halt business until

the notice is resolved. One company didn’t realize they had received a notice

at their Texas location. The notice languished on someone’s desk unheeded. The

company found out when the state notified them that their ability to do business

had been shut down in that state. It was a scramble of extra time and cost in

penalties to bring the business back into active status in the state.” [x]

 

 Nothing about MFA compliance and “free software” is free or simple

 

“To effectively comply with sales tax regulations, you will need cooperation from several areas within your business:

•           Accounting must track and apply sales tax law changes across every jurisdiction where your company does business, as well as create and maintain detailed records of sales tax compliance activities.

•           Sales must help the company determine whether new locations or accounts will bring with them additional sales tax compliance issues.

•           IT must make changes to accounting systems and e-commerce systems, plus allocate adequate electronic storage for compliance records”  [xi]

 

 “Sales tax compliance tasks do not generate revenue and drain scarce resources” [xii]

 

 “At a time when businesses are trying to do more with less, utilizing staff time to stay compliant with multijurisdictional sales tax collection requirements is a poor use of resources.”  [xiii]

 

From a recent Avalara webinar questions and answer section :

“Speaker 2:  “A couple of folks have also asked about what they’ve read in the Market Place Fairness Act and that the technology will be provided to them, and I think that actually is pulled directly from SST in that this volunteer versus nonvolunteer concept. Using a CSP in Avalara is only one of a handful of CSPs. Can we talk to that at all? I mean the technology itself, is it provided? Do they get it for free? How does that look?”

 

Speaker 1: “But it’s easy to say the state is going to provide the information that you need to calculate it, but when the rubber hits the road and you really figure out what you’re being given in terms of what is currently available from SST states it’s fairly primitive. So, that’s where I’m going to just end it. Listen, if anyone thinks that the states are going to be in a position to provide a reliable, accurate rooftop calculation on an automated basis that’s not what the states are going to do.”  [xiv]

 


 

[i] Sales Tax Survival Guide 2013, Avalara.  Page 1.

[ii] Ibid.  Page 2.

[iii] Ibid.  Page 4.

[iv] Ibid.  Page 3.

[v] Ibid.  Page 3.

[vi] Ibid.  Page 6.

[vii] Ibid.  Page 10.

[viii] Ibid.  Page 7

[ix] The Challenges of Use Tax Compliance, Avalara.  Page 4.

[x] The Hidden Costs of Your Manual Sales and Use Tax System, Avalara 2011, page 3.

[xi] Sales Tax Survival Guide 2013, Avalara.  Page 8.

[xii] Ibid.  Page 9.

[xiii] Ibid.  Page 9.

[xiv] http://www.youtube.com/watch?feature=player_detailpage&v=0OUChFkv_C8#t=3300s 

Avalara Webinar “Sales Tax Showdown” May 2, 2013