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.

 

 

 

 

 

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