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The federal Marketplace Fairness Act of 2013 was introduced in the House of Representatives and the Senate on February 14, 2013.  If passed, the bill would authorize states that meet certain requirements to require remote sellers that do not meet a "small seller exception" to collect their state and local sales and use taxes.  Under the legislation, a state would be authorized to require a remote seller to collect sales and use taxes only if the remote seller has gross annual receipts in total remote sales in the United States of more than $1 million in the preceding calendar year.

 

Member states of the Streamlined Sales and Use Tax (SST) Agreement would be authorized to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to that member state pursuant to the provisions of the SST Agreement. The SST Agreement would have to include certain minimum simplification requirements. An SST member state could begin to exercise authority under the Act beginning 90 days after the state publishes notice of its intent to exercise such authority, but no earlier than the first day of the calendar quarter that is at least 90 days after the date of the enactment of the Act.

 

States that are not members of the SST Agreement would be authorized, notwithstanding any other provision of law, to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to the state if the state implements certain minimum simplification requirements. The authority would begin no earlier than the first day of the calendar quarter that is at least six months after the state enacts legislation to exercise the authority granted by the Act.

 

To enforce collection requirements on remote sellers that do not meet the small seller exception, states that are not members of the SST Agreement would have to implement the minimum simplification requirements listed below. For SST member states to have collection authority, the requirements would have to be included in the SST Agreement.

 

-       A single entity within the state responsible for all state and local sales and use tax administration, return processing, and audits for remote sales sourced to the state

-       A single audit of a remote seller for all state and local taxing jurisdictions within that state

-       A single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration.

-       Each state would have to provide a uniform sales and use tax base among the state and the local taxing jurisdictions within the state.

-       Each state would have to source all interstate sales in compliance with the sourcing definition outlined below.

-       Each state would have to provide information indicating the taxability of products and services along with any product and service exemptions from sales and use tax in the state and a rates and boundary database. States would have to provide free software for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed, that files sales and use tax returns, and that is updated to reflect state and local rate changes. States would also have to provide certification procedures for persons to be approved as certified software providers (CSPs). Such CSPs would have to be capable of calculating and filing sales and use taxes in all the states qualified under the Act.

-       Each state would have to relieve remote sellers from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of an error or omission made by a CSP.

-       Each state would have to relieve CSPs from liability to the state or locality for the incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of misleading or inaccurate information provided by a remote seller.

-       Each state would have to relieve remote sellers and CSPs from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of incorrect information or software provided by the state.

-       Each state would have to provide remote sellers and CSPs with 90 days’ notice of a rate change by the state or any locality in the state and update the taxability and exemption information and rate and boundary databases, and would have to relieve any remote seller or CSP from liability for collecting sales and use taxes at the immediately preceding effective rate during the 90-day notice period if the required notice is not provided.

 

For non-SST member states, the location to which a remote sale is sourced would be the location where the item sold is received by the purchaser, based on the location indicated by instructions for delivery. When no delivery location is specified, the remote sale is sourced to the customer's address that is either known to the seller or, if not known, obtained by the seller during the transaction, including the address of the customer's payment instrument if no other address is available. If an address is unknown and a billing address cannot be obtained, the remote sale is sourced to the address of the seller from which the remote sale was made. SST member states would be required to comply with the sourcing provisions of the SST Agreement.

 

On March 22, 2013, the U.S. Senate voted 75-to-24 in favor of the concept of the Marketplace Fairness Act. The actual Marketplace Fairness Act was introduced in both chambers in February, but last week Senator Enzi, the sponsor of the Senate bill, offered an amendment to the 2014 Budget Resolution that would include insertion of the language of Marketplace Fairness in the budget. It was a largely symbolic tactic since the Budget Resolution itself will not become law, but by approving the amendment, the Senate has shown that there is broad, bipartisan support for the notion of requiring remote sellers to collect sales tax.

 

On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act with a 69-27 vote.

 

UPDATE: On September 18, 2013, Rep. Bob Goodlatte, the chairman of the House Judiciary Committee released a set of seven principles that he believes any internet sales tax bill should meet.  The seven principles outlined by Goodlatte are tax relief, tech neutrality, no regulation without representation, simplicity, tax competition, states’ rights, and privacy rights.  For more details on the principles, click here to see the House Judiciary Committee’s press release.

 

We are continuing to track the activities of these bills.  We are also involved in planning efforts involving states and businesses regarding the potential implementation consequences of passage.  Watch for updates in the Sales Tax Compass as well as through our Twitter account and LinkedIn updates. 

 

The text of the bill passed by the Senate can be viewed here.

 

For an update on this news item, visit Senate Introduces Marketplace Fairness Act of 2015.

 

(H.R. 684 and S. 336, as introduced in Congress on February 14, 2013; S.743, as passed by the U.S. Senate on May 6, 2013)

(09/20/2013)

California’s sales and use tax rate will increase by 0.25%, from 7.25% to 7.5%, effective January 1, 2013, due to voter approval of Proposition 30. The increased tax rate is applicable from January 1, 2013 through December 31, 2016.  Voters in some California cities and counties also approved new or increased district taxes that will go into effect April 1, 2013.  If a retailer incorrectly collects sales or use tax at the previous lower rate after January 1, 2013, the retailer will still owe the 0.25% difference. If a customer purchased merchandise before January 1, 2013, but returns it after that date, the retailer should refund tax based on the rate that was in effect at the time of the sale. The 0.25% rate increase will apply to all taxable sales and purchases made as part of fixed-price contracts and fixed-price lease agreements that were entered into before January 1, 2013. The increased rate will replace the rate that was in effect at the time the fixed-price contract or lease agreement was entered into. The sales and use tax rate increase does not apply to sales of motor vehicle fuel, but the rate increase does apply to sales of diesel fuel. Effective January, 1, 2013, the sales and use tax rate for diesel fuel is increased to 9.67% plus applicable district taxes. The increased rate for diesel fuel will be in effect through June 30, 2013.  (Sales and Use Tax Rate: Increases January 1, 2013, California State Board of Equalization, November 2012; Special Notice L-344, California State Board of Equalization, December 2012)

(01/28/2013)

A California court has found that transient occupancy tax is based on the room rental received by the hotel, not on the amount paid to an online travel company (OTC) by the customer. Santa Monica attempted to enforce its transient occupancy tax against several OTCs. The city alleged that the OTCs enter into contracts with hotels, under which the OTCs act as independent, nonexclusive sales agents for hotels and must collect and remit the transient occupancy tax on the total price paid by the customer. The OTCs sell nightly lodging licenses provided by the hotels on behalf of the hotels. After the sale of a license, the OTC collects all funds from the customer and takes a commission before passing the remaining money to the hotel. The OTC also collects and retains tax on the value of the commission. The hotel only receives tax for remittance to the city on a portion of the total charge for lodging. The OTCs argued that the local transient occupancy tax should be based on the amount paid to the hotel for the room. The court reviewed the tax law and found that the tax is properly calculated based on the sum paid to the hotel. Regardless of whether a customer pays a hotel directly or an intermediary, the tax is based on the total amount paid to the hotel for the room rental. The court found that the statute is silent in regards to whether the hotel exercises control over the price charged by a reseller or intermediary. As such, a charge made by a hotel to a customer within the definition of a room rental must be interpreted to refer to charges paid to the hotel. The hotel does not receive the commission. The city argued that the step transaction doctrine dictates that the OTCs sales to customers should be taxed based on the total amount paid by the customer. The court found that the language of the ordinance does not support a conclusion that the purpose of the local ordinance is to base the tax on the amount paid by the customer, as opposed to the amount paid by the customer or an intermediary to the hotel. (City of Santa Monica v. Expedia, Inc., California Superior Court for Los Angeles County, No. JCCP 4472, March 16, 2011)

(07/24/2012)

The California State Board of Equalization has issued a notice detailing the sales and use tax treatment for Deal-of-the-Day Instruments (DDI). Websites such as Groupon offer DDIs which feature coupons redeemable for merchandise or service at local or national retailers. Customers purchase the DDIs at discounted prices which allow them to buy a set amount of products or services from the retailer offering the DDI. In accordance with California regulation, DDIs with the specific terms and conditions listed in the notice are considered retailer coupons, so the retailer is the issuer of the DDI. The terms and conditions can be viewed here. When a DDI is redeemed by the customer, the retailer’s gross receipts subject to tax include the amount paid by the customer for the DDI plus any additional cash, credit, or other consideration paid to the retailer at the time of the purchase with the exception of sales tax. Therefore, the retailer must collect tax on the DDI selling price which the customer paid to the DDI Provider even if no additional revenue is collected at the time of redemption. If additional revenue is paid by the customer in conjunction with the redemption, that additional amount is also subject to tax.

The sale of the DDI is not considered a sale of tangible personal property or a service. Instead, the DDI is evidence of an intangible right to receive tangible personal property or a service at a later date. Therefore the sale of the DDI itself is not subject to tax. When the DDI is redeemed, it is that sale that may be subject to tax. If the type of sale is not normally subject to tax, then tax would not apply to the sale when a DDI is redeemed. Sales that are generally not subject to sales tax in California are sales of services, sales of cold food to go, and charges for admission to an event. (Special Notice L-297, California State Board of Equalization, November 2011)

(12/13/2011)

California Governor Edmund Brown has signed new legislation that delays the implementation of click-through and affiliate nexus provisions that were enacted earlier this year (under A.B. 28). Under the new law, the enactment of the click-through and affiliate nexus provisions is conditional on federal authorization for states to require sellers to collect taxes on sales of goods to in-state customers regardless of the seller’s location. Effective retroactively to June 28, 2011, the new law restores the definition of a “retailer engaged in business in the state” to the definition that was in place before A.B. 28 was enacted.

Under the new law, the nexus provisions of A.B. 28 are reenacted and made effective on September 15, 2012 if federal authority is not enacted on or before July 31, 2012. Alternately, the provisions will be effective on January 1, 2013 if federal authority is enacted on or before July 31, 2012 but California doesn’t elect to implement the federal law on or before September 14, 2012. The legislation doesn’t specify what the operative date would be if federal authority is enacted by July 31, 2012 and California implements it by September 14, 2012.

The new law also increases the threshold for the click-through nexus provisions. The threshold is raised from $500,000 in total sales in California (outlined in A.B. 28) to $1 million. Click here for more details on the enactment of A.B. 28.

This bill was in reaction to a petition for a state wide challenge to repeal the original bill. If the efforts had gained enough signatures and been submitted by the deadline, it would have been placed on a state-wide ballot in the next general election. (A.B. 155, as enrolled and sent to the governor on September 14, 2011, effective September 23, 2011; Press Release, Office of the California Attorney General, July 18, 2011; Referendum, Initiative and Referendum Qualification Status, California Secretary of State, July 18, 2011; News Release 83-11-H, California State Board of Equalization, July 18, 2011)

(10/24/2011)

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