In 1992, the Supreme Court ruled in Quill Corp. v. North Dakota that a state can’t require an out-of-state business to collect and remit sales taxes to it if doing so is burdensome to the business.
The Marketplace Fairness Act (MFA), recently passed by the Senate and under consideration in the House, ignores the need to simplify tax collection obligations and instead ensures that compliance will be burdensome for small businesses. In a recent Daily Caller op-ed, Drex Davis provides a high-level introduction to the burdens imposed on small businesses by the MFA. My personal experience confirms his assertions.
Unfortunately, proponents of the MFA such as Senator Lamar Alexander (R-TN) have claimed that tax collection post-MFA will be “as simple as looking up the weather on a person’s computer.” This illustrates a deep misunderstanding about the complexity of tax laws, jurisdictions and the software systems that are necessary to tie the mess together.
Each of this country’s 10,000 different taxing jurisdictions has its own laws for applying sales tax to all sorts of goods — including food, prescription drugs, non-prescription drugs, software, clothes and much more. Plus, within the same zip code, even on the same street, different tax rates can apply. I manually downloaded and printed the sales tax rates by zip code for all of the states. It’s over 38,000 lines long and 811 printed pages.
MFA proponents argue that the “free software” (paid for by the states) will make this complexity irrelevant. But the software will only provide me with rates, not product categories, and it will do nothing to help lift the time-and-money burden of submitting up to 600 tax returns per year. So much for “free.” I can use an unsubsidized software program like the one Avalara produces, which simplifies the process to some degree, but if I did that I’d have to pay Avalara a fee on every single sale I make, plus about $29 for every tax return I file. For my business, that would be $16,000 in remittance costs annually, plus thousands of dollars in transaction fees.
The problems and costs don’t end there. I scheduled two meetings with Avalara to walk me through implementation of their software. Like many other small businesses, I use the accounting software Sage 50 (formerly Peachtree). The Sage 50 platform isn’t capable of live, forced compliance, so the Avalara representatives I spoke with told me I’d have to upgrade to the Sage 100 platform in order to automate my sales tax calculations. They also said my shopping cart isn’t compatible with their program and would have to be modified. Moreover, I’d have to change my entire sales software and strategy because no multi-channel cart solutions are currently supported by their software. To integrate Avalara’s software, I’d have to spend at least $40,000 in the first year alone, and then a certain amount each year after that.
I wish I could say that was the end of it, but I can’t. I’d also have to categorize all of my products to be readable by the software. Contrary to statements by pro-MFA politicians, neither the MFA nor the Streamlined Sales and Use Tax Agreement (SSUTA) provide rate simplification or designate what is taxable and what isn’t. This means that small business owners will have to become experts on tax law in the 46 sales-tax states so that they can tag their products to be software readable.
This is virtually impossible. For example, in Idaho clothing is exempt from sales taxes but in Minnesota it’s not. In other states, clothing might be exempt, depending on the price. That is — of course — unless it’s not. In Massachusetts the categorization requirements are unbelievably convoluted and confusing: sports bras are tax exempt, but sports shorts aren’t. A sewing button is exempt but a scrapbooking button isn’t. That same sewing button isn’t exempt if it’s included in a sewing kit. Yarn is exempt unless it could be used to make a rug. Thread is exempt, unless it’s sold with a needle. These are just a few examples of thousands.
Software isn’t going to make these distinctions or judgment calls. We will be forced to make them, and that will mean huge time investments. But that still won’t protect us. If an out-of-state auditor disagrees with our categorization, we could be held personally liable for uncollected taxes or penalized for over-collecting.
The MFA fails to satisfy the minimum requirements set forth by the Supreme Court because collecting and remitting sales taxes for remote states is extremely burdensome on small businesses like mine. Congress needs to scrap the MFA and go back to the drawing board.