Search This Blog

Tuesday, December 20, 2011

Mainstreet Fairness, Small and Equity

The House Judiciary Committee hearing of November 30, 2011 on federal legislation to allow states meeting certain simplification requirements to collect sales tax from remote vendors highlighted a key issue. The issue is whether such legislation should exempt small sellers and if yes, what is the appropriate de minimis level. At the hearing the suggestions for "small" seller were basically $100,000 of sales and $30 million of sales, with nothing in between (other than the $500,000 in S. 1832). How can the definitions be that disparate?

While there are good reasons for exempting small businesses from certain rules, defining small is challenging. The federal tax law has numerous definitions (see "The Many Sizes of "Small," AICPA Corporate Taxation Insider, 10/28/10).

The reasons for suggesting a low dollar amount for "small" ...
  • Ensure that the bulk of e-commerce sales are subject to the tax.
  • Reality that there are third party collection agents and software that make it easier for small businesses to collect sales tax from all customer.

Reasons for a larger dollar amount for "small" ...

  • To ensure that small businesses have greater likelihood of succeeding against large vendors.
  • Costs to comply may exceed tax to be collected.

$30 million for small - saying that sellers below this threshold cannot collect sales tax from customers is puzzling. These are decent size companies that likely engage in many sophisticated transactions that are more complicated than setting up a system to collect sales tax in all states with customer (or at least those that meet the simplification requirement of the legislation).

One item I did not hear mentioned at the hearing (I watched the archived webcast) was that some good number of sellers, such as on eBay, are not in a business and would not be registered to collect sales tax. Customers will still need to maintain records of such purchases and self-assess the use tax.

I have a short article in the AICPA CPA Insider on the hearing and the small/equity issue - "Repeal of Quill Hinges on Defining Equity."

What do you think the sales level should be to define any small business exempt from collecting sales tax in states in which it doesn't have a physical presence?

4 comments:

Kathy M said...

AS I see small "main street" businesses that I loved close, I am not sure that there should be any exemption - unless they get it too. It is not so easy even with one state. Certainly it should be a very small number.

Stephen L. Nelson, CPA said...

Good post, Annette, thanks.
As both a practicing tax accountant and a small Internet retailer, though, I wonder if the compliance costs aren’t going to be a way bigger issue than people realize.
For one thing, I suspect there are are many more sales tax jurisdictions than legislators and voters realize. It’s not just the (roughly) fifty states. Local sales taxes exist, too. E.g., here’s the list of rates that Washington state localities impose and which need to be reported:
http://dor.wa.gov/docs/forms/ExcsTx/LocSalUseTx/LocalSlsUseFlyer_Quarterly.pdf
And another thing worries me... While the calculation and collection can occur almost automatically with good software I think the real headache will be the actual return preparation. I would assume that in my practice we’d probably want to charge $100 or $200 per state return if we’re going to have to do anything on paper or screw around with a separate login and online wizard. And if that’s so, am I going to be trying to bill some small ecommerce retailer $5,000 to $10,000 a month for preparing 50 or 100 sales tax returns? One can say, well, you can solve that with software... but I don't think the states and localities do all that great a job with income taxes...
And then of course that’s the cost of examinations and audits. Ugh.
Given all this, I assume a sales tax on Internet retailers will kill off the small guys or push people offshore.

tax services said...

Great post, appreciate the perspective and I couldn't agree more!

Kenneth Gibbons said...

You are on point. I agree with your blog.