Search This Blog

Wednesday, May 8, 2013

Nexus Oddities of the Marketplace Fairness Proposal

On May 6, 2013, the Senate passed S. 743, the Marketplace Fairness Act (69-27). That is the farthest this bill has gotten in the past almost 20 years. President Obama has indicated he supports it, but it's not clear if the House will act upon it or pass it.

Basically, this bill provides a mechanism where states can become authorized to collect sales tax from remote (non-present) vendors.

A "remote sale" is one where the vendor "would not legally be required to pay, collect, or remit State or local sales and use taxes unless provided by this Act." A small seller exception applies for vendors with remote sales of $1 million or less in the prior calendar year.

S. 743 does not eliminate the longstanding, difficult issues of determining whether a vendor has sales tax nexus in a state. For example, if an employee is in the state for two days to help a customer, is nexus created? If yes, the vendor has sales tax collection obligations even without S. 743. If nexus is not created, sales into that state are used to determine if the vendor meets the small seller exception. Errors in knowing if a vendor has nexus may become more significant with S. 743. 

Example: In 2013, I-Vendor, located in State X, has $2 million of sales to customers in State X. I-Vendor also has $900,000 of sales to customers in six states in which it does not have nexus. Under S. 743, I-Vendor is a small seller that only needs to collect sales tax in State X.  

In 2014, I-Vendor obtains new customers in State Y with total sales of $200,000. Other sales remain the same as for 2013. I-Vendor is not sure if it has nexus in Y. If it does have nexus in Y, it must collect from customers in X and Y and remains a small seller. If it does not have nexus in Y, I-Vendor is no longer a small seller and now must collect sales tax in all authorized states, starting in 2015. If all of the states in which I-Vendor has sales are authorized to collect under S. 743, I-Vendor has filing obligations in 7 more states starting in 2015.

An oddity of the above is that any of the six states would benefit if I-Vendor does NOT have nexus in State Y.  That is, that those sales are remote ones that push I-Vendor out of the "small seller" exception.Might any of those states pursue I-Vendor arguing it has no nexus in State Y?

Also note that "small seller" could actually be a very large vendor with nexus in one state and aggregate sales in states where it does not have sales tax nexus remaining under $1 million.  Meanwhile, a smaller vendor operating out of one state with sales in other states in excess of $1 million, has to collect in all of these states even though its aggregate sales are less than that of the large vendor who might actually have more resources to handle multistate sales tax compliance.  Perhaps there should be another measure of small that looks not only at remote sales, but also total aggregate sales.

Nexus questionnaires would still be needed and likely used by the states. When a vendor says it has total remote sales of $1 million or less, any of these states would benefit from a finding that the vendor actually has a physical presence in the state because then it has to collect.

What do you think? 

For more on S. 743 and other similar proposals, see this part of my Affiliate Nexus website.