The rise of ecommerce has reduced local brick-and-mortar retail sales and the corresponding sales taxes from those transactions — putting states and localities in a revenue bind. A hodgepodge of efforts from the states and, now, the federal government to address the shortfall, and to tax ecommerce sales, is firmly underway.
To explain the status of Internet sales taxes, and the U.S. Congressional efforts at a nationwide solution, we recently spoke with Jonathan Barsade. He’s a sales tax expert, and the founder and CEO of Exactor, a sales-tax management platform.
Practical Ecommerce: What is the status of Internet sales taxes as it applies to ecommerce merchants in the U.S.?
Jonathan Barsade: There’s a lot of confusion in the area of Internet sales. There’s a perception out there that there are no taxes on the Internet. That is incorrect. So one thing to be really clear on is that sales tax do apply to the Internet. There is no law that says that the Internet is a tax-free zone.
The question isn’t so much of one of whether or not taxes apply, but rather enforcement. Can the states enforce their rules?
PEC: With the mishmash of state laws and court cases, what’s an ecommerce merchant supposed to do now, to comply?
Barsade: That’s an interesting question as there are many merchants — even though they might not be required to collect taxes when they’re selling in out of state situations — they still do it because they want to be on top of things. They’re anticipating that there will be a rule and they see no reason not to collect the taxes. What merchants can do today, if they do want to comply, is to use one of the different platforms [such as Exactor and others] that can help them in their compliance efforts. They are not costly. They can calculate the taxes and generate and file their returns.
PEC: Moving on to efforts by the U.S. Congress to pass a bill to make sales taxes uniform nationwide. Last year those efforts failed. The bill was called the Marketplace Fairness Act. It didn’t pass. It passed the Senate. It didn’t pass the House. What’s the status of the MFA this year, of becoming law?
Barsade: Over the last few years the Congress has tried to respond to the situation. Last year the Marketplace Fairness Act passed the Senate with a very large bipartisan majority. In the House there was a bipartisan support, too, but the bill stalled in the judiciary committee.
Essentially what the MFA does is to adopt the principals of the Streamline Sales Tax project, which is an agreement between states to collect sales tax. The purpose of Streamline is to simplify and standardize the rules for interstate sales tax.
The MFA includes a state-funded mechanism for supporting businesses in their sales tax efforts, [to use] certified service providers [such as Exactor and others]. The merchants don’t pay for these providers. This mechanism has been working for over eight years now with very high levels of success and is adopted not only by large business but even for small mom-and-pop businesses.
The MFA was resubmitted in the Senate just two weeks ago. It’s been supported by members of both parties. There are currently two proposed bills in the House. One is very similar to the MFA. The other has been submitted by the opponents of the MFA. Where the two bills differ is more on how they determine where the transaction occurs. Do you use the location of the buyer or that of the seller?
The alternative bill does not include the state-funded compliance system. The prevailing opinion is that a bill will pass this year. It’s unclear which of the two bills it will be. But there is a common notion is that something will happen in 2015.
The president said last year that he supports the MFA.
PEC: So if MFA passes in 2015 in the form that it passed the Senate last year, a merchant would hire one of these certified providers, such as your company. How many of these providers are there?
Barsade: There are six providers today. Streamline will be likely be adding additional providers as the bill passes.
PEC: So, if the bill passes in that form, the merchant can choose the provider. The provider’s platform would integrate with a merchant’s shopping cart to automatically compute and pay the tax. But the state or the local taxing district would pay the provider’s fee for that work, and not the merchant. Is that it?
Barsade: That is correct.
But let me add just one caveat. Merchants are not required to hire a provider. They could do it on their own if they wanted.
PEC: How many taxing districts are there in the U.S.?
Barsade: About 10,000.
PEC: Internet sales tax is often referred to as “Amazon Tax.” What’s Amazon up to with all of this?
Barsade: Amazon is a staunch supporter of the MFA. Twelve years ago, the CEO of Amazon was quoted as saying that Amazon will never pay sales tax. Then fast forward to mid-2007 and 2008, when the economic meltdown occurred. States started looking new sources of revenue. Internet sales taxes was a prime target because it was an unexplored area.
In 2007 or 2008, New York passed what eventually became known as the Amazon Law. What New York said was that even if a company doesn’t have any presence in the state, if they allow residents of New York to advertise on their website, that that will create nexus, [so that the company must collect and remit sales taxes]. It was obviously targeted to Amazon, which at the time objected. Amazon went to court. They appealed. They got all the way to the Supreme Court and they lost. Many other states followed suit and passed very similar laws.
So Amazon has now turned this seemingly obstacle into a market opportunity. In the last few years, it has approached states that passed similar laws and actually offered to build a local distribution center, hiring thousands of local employees. Amazon agreed to start paying sales tax and what they got in return was a deferral on the sales taxes that were due. Amazon is now using these local distribution centers as the basis for their same day delivery initiative.
And so what we’re seeing is that Amazon took the sales tax obstacle, turned it into a market advantage. Today they’ve become very strong supporters of the MFA.
PEC: Tell us a little bit about Exactor, your company, which is one of the six certified service providers in Streamline.
Barsade: We’ve been in production for over eight years. We’ve been certified under Streamline from the first round. We provide end-to-end solutions for sales and use tax compliance. We can connect at any point where a seller needs to calculate taxes. It can be either at the shopping cart, in the accounting program, the ERP system. Our service calculates the taxes automatically and seamlessly without slowing down the transaction or without having to perform any additional functionality. It’s all done for you automatically and will insert the taxes accurately into the shopping cart or the invoice or the purchase order, wherever it is.
PEC: Does Exactor integrate with every cart?
Barsade: We integrate with many carts, especially the most prevalent ones. We also integrate with many accounting programs such as QuickBooks, the Sage family, and the different Microsoft products. For more customized environments, we have the ability to integrate there as well. Our prices start at about $30 a month but it will go up depending upon the level of transactions and the number of returns that need to be filed.
PEC: Anything else?
Barsade: Taxes are a part of our lives and taxation of online transactions is inevitable. Ecommerce today is an integral part of commercial activity. So there’s no reason that the same rules shouldn’t apply. The evidence from the last eight years has shown that merchants will do just fine with this adaptation. Many online businesses already collect taxes and they manage to be viable. We think ecommerce businesses should manage their taxes so that tax management and tax compliance are incidental. It doesn’t take away from their main focus of managing and building up their business.
Online and physical retail should be treated as equals. It’s time that we stop pampering the Internet like some kind of toddler. The Internet is a mature business environment. We should start giving it the respect that it’s due from that aspect.