Katie McAuliffe

How Can a Small Business Cope with 45 State Audits? They Can't

Posted by Katie McAuliffe on Monday, August 12th, 2013, 3:06 PM PERMALINK

The Marketplace Fairness Act remains a highly flawed piece of legislation whose warts are showing and growing. Things are only going to get worse. The Marketplace Fairness Act (MFA) in terms of audits, software integration costs, and compliance will drastically affect small businesses. Online sellers are usually determined as the target of this legislation, but it affects all remote sales, catalogues, manufacturers, wholesalers, and  distributors.  The ramifications are astounding.
“I truly cannot see how our business could possibly handle audits by scores of different states and tax jurisdictions at any one time,” says Rick Smith of Chefsource.com in his Wall Street Journal opinion piece.
As Smith says, “Physical location is the key, and any attempt by other states to pass their tax-collection burden on to me is a grave threat to my business.”  Physical location has been working.  States don’t want to pursue the means of collection already on the books because they know it would be more than unpopular, and they want to extend their tax laws and regulations across their borders to people who cannot vote.
Not only do people like Smith have concerns on what is in the bill, they also are concerned by what is not addressed in the bill. Smith asks, "how would this new remote auditing power be enforced? Will they come to my office like my local auditor does? Of course not. Will we be compelled to attend audits in different states? This is not addressed in the bill or directly addressed in the states' simplification standards document."
"The myth of free software solving everything is especially infuriating to business owners who understand the business processes involved....Every state is allowed to offer its own choice of software. The software might be custom-written by the state, or might be licensed from a tax-software provider. It's not possible to integrate numerous, incompatible "free" solutions into our business. The only solution is to pay a provider."
Instead of helping small business and retailers across the country, all the Marketplace Fairness Act does is increase their burden with new complicated regulations. It is yet another solution in search of a problem.

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Internet Sales Tax Legislation Hits Manufacturers, Distributors, and Wholesalers

Posted by Katie McAuliffe on Monday, July 29th, 2013, 1:13 PM PERMALINK

A letter from Rick Smith of Synergy Computing has been sent to remote sellers to encourage them take a stand against the Marketplace Fairness Act. The MFA, currently in the House Judiciary Committee, will impact all online retailers that make more than $1 million in remote sales annually. Not only this, but vendors, manufacturers, and distributors who sell to these online sellers will be impacted as well, regardless if they sell direct to consumers:

  • Online retailers and manufacturers already are required to pay sales taxes in the states in which they have physical presence, or nexus. The new bill would require companies to collect sales tax on their behalf even without nexus, resulting in up to 46 state sales tax audits every year.
  • The letter outlines two scenarios of how the law will affect sellers, both equally problematic. General issues for everyone include the substantial time it would take to process these audits and compose monthly reports, as well as the heavy costs of obtaining the proper software and integrating trained personnel.
  • The first scenario addresses manufacturers who sell to retailers and directly to consumers. These manufacturers would be subject to the same compliance and audit burdens as other retailers in every single state that applies. Pro-MFA legislators have even introduced a myth of “free software by the states.” Since every state can pick its own software, this means that a company will have to sign up with a paid service to deal with 45 different versions of tax software.
  • The second scenario addresses true-wholesale manufacturers who do not sell directly to consumers, and instead only serve retailers. Their audit risk jumps up to 4500%. With the MFA, they would be subject to the same audit risks as retailers, and would need to prove that their sales are “properly exempt sales.” Their exemption certificates better be on file—if the MFA is passed, they will be audited.

Digital Liberty encourages you to take action and let Congress, as well as your state and local governments, know how the MFA will do nothing but harm online businesses. Spread the word of the MFA’s headaches and hard costs. This bill has already passed the Senate—we need to make sure the House shuts it down!

Read the letter here.

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Marketplace Fairness Act will Cause Businesses to Fail

Posted by Katie McAuliffe on Tuesday, July 23rd, 2013, 9:29 AM PERMALINK

The cost in time and money of complying with the Marketplace Fairness Act is too burdensome to businesses. SnowsportDeals.com owner Chris Chapman tells his small family business story. Small businesses online are located on Main Street!  Online small business and brick and mortar small business are one in the same.

Click the image below to listen to Chapmans' explain that small businesses online are the same as brick and mortar small businesses:

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Marketplace Fairness Act: "Showrooming" Impact is a Myth

Posted by Katie McAuliffe on Monday, July 22nd, 2013, 9:46 AM PERMALINK

Marketplace Fairness Act supporters claim “showrooming,” the act of trying out a product at a store before buying it online, harms brick-and-mortar businesses. In reality, as Scrapbook.com CEO Drex Davis explains, consumers are more likely to do the opposite.

Click the image below to listen to Davis' explanation of this myth:

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Marketplace Fairness Act will Encourage Predatory Audits

Posted by Katie McAuliffe on Friday, July 19th, 2013, 9:32 AM PERMALINK

When OnlineStores.com owner Kevin Hickey was audited by the state of Pennsylvania in 2006, he and his accountant were stuck in a costly appeals process for months. The Marketplace Fairness Act would make people like Kevin liable to be audited by 46 different states.

Click the image below to listen to Hickey's explanation of the problems with auditing:

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Marketplace Fairness Act Would Turn Businesses into Uncompensated Tax Collectors

Posted by Katie McAuliffe on Thursday, July 18th, 2013, 9:28 AM PERMALINK

The Marketplace Fairness Act would essentially turn online business owners into tax collectors for 9,600 localities. Eli Katz, CEO of TheEmob.org, warns that this will cost businesses valuable time and energy.

Click the image below to listen to Katz' explanation of the problems with "free" software:

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Marketplace Fairness Act "Free" Software is like a Free Puppy

Posted by Katie McAuliffe on Wednesday, July 17th, 2013, 1:55 PM PERMALINK

A one size fits all free software hardly has a chance of working seamlessly with all of the different web-based platforms.  Integration costs will put small businesses out of buisness.

The Marketplace Fairness Act offers online businesses “free” software to help them comply with 9,600 different tax codes.

However, as Scrapbook.com co-owner McKane Davis explains, the high integration costs that come with it will wipe out a small businesses narrow profit margins. 

Click the image below to listen to Davis' explanation of the problems with "free" software:

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Small Businesses Identify Serious Problems with Internet Sales Tax Legislation

Posted by Katie McAuliffe on Thursday, May 30th, 2013, 6:44 AM PERMALINK

Small online businesses launched a major effort today to combat misleading claims from those in favor of the Marketplace Fairness Act.  The eMainStreet Alliance announced that they are collecting signatures for their letter to the House Judiciary Committee opposing MFA.

These small online business believe that true Main Street physical retailers and true Main Street Internet retailers are not at odds, but, in fact, allies.  eMainStreet makes the point that “in 2012, big-box retailers accounted for more than 83 percent of online sales. Their online market-share is increasing, and by way of the MFA the growth of their retail oligopoly will accelerate.” This is precisely what happened in the physical retail space.

Here are some paraphrased take-always from the eMainStreet letter:

  • Audit risks for small online retailers will increase by 4,500%.  Not only are there 45 new state audit authorities, but they also comprise a relatively small pool of targets for this type of audit, so proportionally their likelihood of being audited multiple times increases.
  • As online businesses grow they will expand and create nexus in other states, begin to use state services, and voluntarily collect sales tax in those states, while benefitting from actual representation and due process. 
  • “Showrooming” where a customer will visit a store to test a product works both ways – it affects online and physical retailers.  A January 2013 report from PwC shows that only 2% of the 10,000 consumers surveyed research products in-store and then shop online. However, 23% did the opposite and went online to research before buying in-store.
  • There is a significant compliance-driven financial burden associated with “free software.”  In the first year of the law, the integration, compliance and remittance costs for business ranges from $20,000 to $300,000. Many eMainStreet members above the $1M threshold estimate that compliance costs will exceed their entire profits for the year. Forcing layoffs and, in some instances, business closures. 
  • Marketplace Fairness could cost approximately 220,000 jobs.   

Read the full letter here

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States Bank on Online Sales Taxes to Increase Revenue, Not Cut Taxes

Posted by Katie McAuliffe on Wednesday, May 22nd, 2013, 9:15 AM PERMALINK

The Wall Street Journal article “States Bank on Online Sales Tax”  from May 20th is a bit misleading. Amy Schatz reports that “Maryland and Virginia both passed transportation bills that counted on the revenue to avoid implementing future state gas-tax increases, which would kick in if Congress turns down the Internet-sales tax bill.”  This makes it sound like Virginia and Maryland were trying to save their taxpayers some money by shifting revenue sources, however; this is not the case.
Virginia’s full transportation plan is a net increase of $5.9 billion over five years, and Maryland’s plan is a net increase of $4.4 billion over five years.
Virginia may have erased the 17.5-cent tax on gasoline, but they raised the general sales tax from 5% to 5.3% on all retail sales and applied this rate to gasoline.  However, if you live in Northern Virginia or Hampton Roads you’ll be paying and extra .7% in sales tax on local and remote sales for a total of 6%.
Interesting that this is the plan, since the 214 page Streamlined Sales and Use Tax Agreement (SSUTA) calls for tax simplification and many have been arguing that there won’t be complexity in that tax code.  Some, outside of SSTUA, have even implied that the goal is one flat sales tax for each state.  Clearly that is not what Virginia legislators think.
Since states don’t want to simplify their tax codes, the Streamlined Sales Tax Governing Board has downgraded from uniform sales tax and use requirements to common practices, especially in terms of sales price and credits for taxes paid elsewhere. Each SSTUA member state can have its own definitions of taxable items and terms like "Sales Price".
Here is the Amendment that was accepted:
Original:  (1) To ensure uniform application of terms defined in the Library of Definitions each member state shall complete a taxability matrix adopted by the governing board.
Amended:  (1) Library of Definitions: To ensure uniform application of terms defined in the Library of Definitions adopted by the governing board pursuant to Section 327 each member state shall complete, to the best of its ability, Section 1 of the taxability matrix.
              (2) Common Practices: To inform the general public of its practices regarding certain products, service, procedures, or transactions, adopted by the governing board pursuant to Section 335 each member state shall complete, to the best of its ability, Section 2 of the taxability matrix.
Some other interesting points to compare are the fiscal note linked to the final version of the transportation tax hike signed into law, with McDonnell’s revenue numbers attached to the original tax hike plan.  Somewhere along the way, the revenue gained from implementation of the Marketplace Fairness Act decreased when the percentage of tax collected increased. The initial numbers included a collection total of $175.7 million from remote sales tax collection, which only accounts for beginning collection, not the .3% sales tax increase. However, the fiscal note, which does include the .3% sales tax increase seems to claim that remote sales tax collection will bring in $145.9 million.  Someone somewhere is fudging numbers.
Speaking to other points in the WSJ piece, it is worth noting that from the initial Senate vote to final passage: nine senators decided to oppose rather than support, more Republicans voted against the MFA than in favor, and all 7 republican senators age 55 and under voted against the bill.
Its nice that states want to cut the income tax, but those cuts should be revenue neutral.  As was shown above, states are using fuzzy numbers to talk about how much they could collect from remote sales.  For some perspective, the cumulative total of all state general funds is $668 billion; $23 billion is less than 3.5% of general fund revenues.  Plus, in 2012, big-box retailers accounted for more than 83% of online sales and therefore collected sales tax due to physical presence requirements. There isn’t that much “new revenue” to go around.

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Weaponized Audits: If the Fed Does It, Why Wouldn't the States?

Posted by Katie McAuliffe on Monday, May 20th, 2013, 9:18 AM PERMALINK

In light of recent revelations about the IRS’s shady practices – disregarding Fourth Amendment rights online and targeting groups for their political affiliation – Americans should consider three important questions:

1.       Do we really want to grant nearly every state access to our tax records with the IRS?
2.       Do we really want to expand state tax collection authority beyond each state’s borders?
3.       Do we really want state revenue departments with authority as limitless as the Internet?

It is nonsensical to reward the abuse of government power by expanding it. The obviously answer to each of these questions is absolutely not!

States’ physical borders are recognized as the end of state legal authority in tax collection and other matters.  We know from experience that when states have the ability to reach across their borders and tax competitors or target out of state entities with penalties, they will. There’s a reason the Articles of Confederation was an absolute failure. Giving both states and the federal government absolute expansive power is a horrible idea.

Shays Rebellion August 1786-June 1787


On the senate floor, Senator Enzi said that audits on businesses rarely happen, but they do happen, and an expansion of state tax authority across borders allows even more opportunities for businesses to be on the receiving end of a misguided audit.

These are not irrational worries that state IRS' may abuse their power in states searching for revenue.  The action of the Federal Internal Revenue service, targeting groups with a certain affiliation is proof positive that these instances ar enot only possible, but they happen int the worst way.  IT is not a far cry to believe that without the proper safe guards, some states will aggressively pursue businesses and tax revenue from other states.

Just wait for the first time a California department of revenue takes a Mississippi business to court over a sales tax dispute. Opening the door for even one abuse of power is too much, one time too many.


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