Recently, we’ve been discussing the problems of nexus and sales tax laws. We looked at the Marketplace Fairness Act (MFA), which has been presented to Congress as a viable option to level the sales tax playing field for both bricks & mortar and online businesses. It’s also a way to provide states the tools they need to properly collect these taxes.
But is the MFA the best solution to these problems? If not, what alternative exists?
Problems with the MFA
The MFA seeks to simplify complex issues of sales and use tax reporting by compelling remote retailers to collect tax at the time of the sale. This is good in theory but with 45 states and 100’s of regions employing local sales and use tax regulations, implementing the MFA is far more challenging than it seems. Audits would need to be done regularly to ensure those taxes are collected properly. This process can be costly and difficult to manage for small, remote retailers. While software will ease this chore, retailers are still liable for any mistakes in reporting or programming errors. In addition, catching these errors could turn out to be a logistical nightmare, and small e-commerce retailers can pay the price with heavy fines or even substantial jail time.
Another Possible Solution
While the MFA still has a great deal of support and is already being considered by Congress for legislation, tax expert James H. Sutton Jr., CPA, attorney, and at Moffa, Gainor & Sutton PA, believes that it is too full of holes to solve the problem. He has suggested another solution: Consumer Private Reporting (CPR). According to Sutton, CPR would provide “simplified whole dollar amount of taxable purchases in a Form 1099 style format to both state and purchaser to facilitate use tax payment.” In other words, a simple 1099 reporting regulation would make it easier for states to collect their due taxes. A similar law recently enacted in Colorado failed, as reported by Sales Tax Support, because out-of-state companies would not comply with the regulation. That’s why CPR is now being considered at a federal level.
Enacted as a federal solution, CPR would solve the problem of costly and complex audits, making them unnecessary. A systematized database would organize transactions and every online purchase would be tracked and reported.
Problems with CPR
To accurately gauge the tax due, CPR requires collection of information that might violate privacy. This disclosure and reporting presents an issue that some in Congress view as a violation of privacy and even deem unconstitutional – another issue criticized during in the Colorado legislation. Sutton claims this should not present a problem; Colorado simply did not go far enough in protecting privacy rights. With CPR, reporting will remain anonymous. In fact, he claims that it would provide better privacy protection than the MFA, due to the fact that auditing is avoided – a process that clearly presents privacy issues.
It remains to be seen what Congress will do but for now, but most sources currently see the CPR as a better solution than the MFA. Only time will tell.