Blog Tax News Foreign Sellers Advantaged If Sales Tax Bill Passes?

Foreign Sellers Advantaged If Sales Tax Bill Passes?

June 5, 2013. Much of the debate surrounding a controversial online sales tax bill that passed the Senate last month has focused on the potential impact on domestic competition between small and large U.S. retailers, online and off, as well as the burden new collection responsibilities would entail for ecommerce companies.

But critics of the measure also worry that if the Marketplace Fairness Act became law, it would put U.S. sellers at a disadvantage relative to their foreign competitors, who they worry would be beyond the reach of state tax enforcers.

The bill would authorize states that take steps to simplify their tax codes to require retailers beyond their borders to collect and remit sales tax on purchases that residents of those states make on the Web.

The bill would apply in equal measure to overseas retailers and domestic sellers based in other states, according to Christina Mulka, a spokeswoman for Sen. Dick Durbin (D-Ill.), one of the co-sponsors of the Marketplace Fairness Act.

"The Marketplace Fairness Act treats foreign corporations the same as it does domestic corporations. All online retailers that make over $1 million in remote sales, regardless of where the retailer is located, must collect and remit sales tax to states that require it," Mulka told EcommerceBytes in a recent email.

"States currently have and exert tax jurisdiction over foreign companies. In fact, states collect different types of taxes from foreign companies, even when those companies are exempt from federal taxation," she added.

In the debate over the bill on the Senate floor, some members who oppose the legislation argued that states, as a practical matter, couldn't realistically expect to collect sales taxes from foreign companies that don't comply with the provisions of the Marketplace Fairness Act.

Supporters counter that states already have a number of mechanisms available to them to enforce the collection, including placing liens on a foreign company's property, levies and seizures of assets.

Mulka also pointed out that states can obtain information about shipments of merchandise bound for their jurisdiction from U.S. Customs and Border Protection, "so they know what products are coming in and from where."

"In some instances, they may have more information about international shipments into the state than they have on domestic shipments," she said.

But while states have enforcement tools at their disposal, compelling non-compliant foreign sellers to collect and remit taxes could present significant challenges, according to Helen Hecht, tax counsel at the Federation of Tax Administrators (FTA), a group representing state and local tax authorities.

Hecht provided EcommerceBytes with a legal analysis that her organization has prepared assessing the provisions of the Marketplace Fairness Act. The group supports the bill, though it has identified several obstacles tax administrators could face when dealing with overseas sellers.

"The problem arises due to the nature of Internet business: A foreign seller may have no assets in the United States, and no motivation to comply with a judgment. It may be nearly impossible to enforce the judgment overseas. From a practical standpoint, it may occasionally be necessary to collect tax due on foreign Internet sales from the U.S.-based purchaser," the FTA said in its analysis.

"A state may turn to legal remedies to enforce the obligation, but the real difficulty lies in discovering the purchases and identifying the sellers. For this, a state may need to rely on audit of domestic purchasers, and possibly turn to information from Customs to identify and collect sales and use taxes due," the group concluded.

As a general matter, under the Marketplace Fairness Act foreign companies selling to residents of a given state would be subject to that state's sales-tax laws, and could face the same enforcement remedies that states can marshal against domestic debtors.

However, according to the FTA:

"Traditional remedies such as liens and seizure of assets present a unique problem where foreign companies must remit use tax based solely on their Internet sales into the state: The company may not have any assets or property whatsoever located in the United States. In the absence of any simpler remedy, a state may have to go to court overseas to enforce against the foreign company."

Alternatively, states could resort to suspending or revoking the registration that foreign sellers would be required to obtain to sell to that state's residents, though the FTA suggests that the impact of such an action remains "unclear."

"A large-volume, reputable foreign seller would likely be motivated to comply with U.S. laws in order to maintain its market. However, a smaller foreign seller might be less inclined to register since it offers them no real benefit (and increases the amount they must charge)," the group said.

"The seller might not even be aware of its duty to register. Furthermore, Internet sales are very hard to track unless the seller or purchaser reports them. A foreign seller could conceivably continue making Internet sales into a state without the state ever becoming aware."

But there are other remedies that suggest the problem of foreign non-compliance would be limited in scope. As Durbin's spokeswoman pointed out, state tax administrators could obtain detailed information about inbound shipments from foreign sellers from U.S. customs authorities, which the FTA said "the states may be able to use it to identify international sellers who are remiss in registration or collection, and apply appropriate remedies."

That information could also be used to identify the domestic purchasers of overseas goods and collect the revenue owed in the form of a use tax. Currently, states with sales-tax laws require residents to report online purchases where the taxes weren't collected by the seller on their income returns, but most shoppers either don't know about that requirement or ignore it.

But armed with Customs data, state tax authorities could more easily track international Internet sales and identify the purchasers, who could then be compelled to remit the use tax.

Further, the FTA cites a University of Tennessee study that estimated that business-to-business sales account for 93 percent of all ecommerce activity. The group interprets that statistic as an indicator that states could recoup a large portion of tax revenue that foreign sellers fail to remit through audits of corporate buyers, which are required to keep far more detailed purchase records than individual consumers.

By EcommerceBytes

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