Sales Tax Business Executive Testifies on Taxation of Internet Sales

Streamlined Sales Tax (SST) is a collective effort by member states to collect taxes owed to them for purchases made by people or companies residing in their individual state. Currently, if sales tax is not collected by a seller at the point of sale, the individual or small business that purchased the goods or services is expected to self assess these taxes - accruing, reporting and paying what is commonly referred to as Consumer Use Tax. This method is burdensome, unreasonable and ultimately results in billions of lost tax revenue for the states.

From an efficiency perspective, the best way of collecting these taxes is at the point of sale, making it far more logical to have the seller assess, report, and remit the tax. Historically, however, the large number of taxing jurisdictions and the complex rules associated have made it impossibly burdensome for the small business "seller" who does not have, nor can he/she afford, the specialized resources required to manage the sales and use tax process.

New technological developments and capabilities have converged with the Streamlined Sales Tax Initiative, engendering an internet based service model that allows for the efficient calculation and collection of taxes at the point of sale and allows small businesses to participate in the benefits of low cost and near-zero-burden tax compliance.

Should Small Businesses Be Exempt From Collecting Taxes?

This is a political issue that Avalara is neither for nor against. We serve small and mid-sized businesses and therefore believe we should not take a stance on this issue.

The real question is how tax should be collected from purchasers who buy products or services from a remote seller. According to statutes in the majority of states, tax is required to be paid on these transactions. However, we know that for various reasons, people making these purchases are not paying the tax unless it is collected at the time of sale. So in effect, when a person buys a good or service from one remote company (who has nexus), they pay the tax at the time of the transaction, and if they purchase the same good or service from another remote company (who does not have nexus) they do not. Shouldn't we have a tax system that treats all purchasers the same, and enforces the collection of tax no matter from whom the purchaser decides to source the product or service? This works in theory, but there are some unanswered questions and issues insomuch as the businesses faced with assessing and collecting the taxes do not have the resources to do so.

What Are the Hurdles Faced By Small Businesses In Collecting Taxes?

Avalara works with small and medium businesses ("SMBs") every day. We work with partners in the accounting software reseller channel to deliver our AvaTax service to customers with the goal of "Making sales tax less taxing". Our mission is to transform the tax process for our customers by creating cost-effective, state-of-the- art solutions. We do so through integrated software that provides transparent transactions, accurate tax compliance, painless administration and effortless reporting.

SMBs, especially small businesses, do not have employees with the necessary expertise to manage the sales tax process and the thousands of associated jurisdictions, rates, rules, and filings. They are focused on providing goods and/or services to their market, not in complying with complex statutes that redirects time and effort away from achieving their business goals and objectives. Companies, such as Avalara, have emerged to provide a full Sales Tax Management Service (STMS) replacing the historically expensive software installed on site requiring expensive consulting resources to implement properly. With STMS, tax compliance is affordable for small businesses.

The vision of STMS is to provide a compliance service with very little administrative burden and virtually no cost -- allowing the small business to focus on the reason they are in business not figuring out sales tax compliance. Avalara and other companies have taken this vision and invested significant resources in realizing it. We have automated compliance and made it easy to assess and collect sales taxes.

With STMS, a small business owner can sign up and gain access to these benefits without causing disruption to their business operations. Avalara, as well as other CSP candidates, have pre-built interfaces to popular accounting, ERP, eCommerce, and payment gateway systems. These systems are a growing number of packages that are commonly used in the market place. They include products from Intuit (QuickBooks Pro, Enterprise and Premier editions), Sage (ACCPAC Advantage Series, MAS 90, MAS 200, MAS 200 SQL and MAS 500), Microsoft (Great Plains, Navision), Nodus Technologies, and others. We have a growing number of independent development companies and software publishers that have created interfaces to other packages and technology platforms. As people become more aware of SST and the needs of small business, these interfaces will continue to grow and will be available to more and more business owners.

What Are the Costs of Compliance?

Sales tax compliance involves research in understanding the statutes, compiling the rates associated with the thousands of taxing jurisdictions, associating the rates with boundary data so the rates are applied correctly, research in product and entity/use exemptions and exceptions and the associated rules in applying the exceptions such as caps and thresholds, timing and calculations of prepayments, tax returns, remittance, internal and external audit, and interest and penalties due to mistakes.

In working with small businesses, we know they typically do not understand all the details around compliance and do not have a handle on the costs to their business. They do know it is overwhelming and a drain away from the very reason why the business was started in the first place. Compliance to sales tax law for these businesses is costly. The changes introduced by SST and standardized statutes among member states, although necessary and a benefit in the long run, introduce uncertainty and an administrative burden in the short term. However, STMS - made possible by the advancement of technology - is available on the market place today and drastically reduces compliance costs.

 

Figure 1: Cost of Compliance Quandrant

 

 

 

America understands the importance of small business to our continued growth and prosperity. Small business already faces many challenges in serving their marketplace even without considering the burden of tax compliance. STMS provides the vision of reducing administrative burden through technology and compliance services. These services eliminate the need for small businesses to hire specialized tax resources, not only through full compliance software and services, but the ability for small business to use the accounting and e-commerce packages they use today to plug into the compliance services. In partnering with service providers, small business will no longer have to worry about the amount of tax collected, the allocation of time and resources to fill out tax returns, prepare for a tax audit, or worry if they will be found out of compliance and required to pay penalties and interest. With STMS, the effort and worry is shifted from the small business to the service provider.

How Should Certified Service Providers Be Compensated?

Certified Service Providers are responsible for calculating, collecting, and reporting the correct amount of tax for a given transaction. In determining how to compensate CSPs, we need to consider not only the costs of compliance, but the size of business, complexity and diversity of products and services offered, the size and number of transactions, and whether or not the transactions are taxable or exempt.

CSP compensation should be designed to provide incentives to sign up sellers in all business and industry groups. The way the compensation is structured will determine the business and industry groups the CSPs will target. For example, if CSP compensation is based on tax revenue collected, CSPs will make the most money on companies with low-volume, high-cost items and will therefore focus on signing those sellers up under Streamlined. If compensation excludes non-taxable transactions, food, and to a lesser degree clothing and medical equipment industries, they will be excluded as well as companies who sell primarily to government, school, and non- profit organizations. If compensation uses a single rate, whether that is transaction or tax revenue based, big business will benefit at the cost of small business because the margins will be higher.

Avalara will work with whatever compensation model is provided. We do believe, depending on the compensation model, there will be winners and losers in the business community. To avoid having winners and losers, we believe a tiered pricing model based on transaction volume more closely represents the cost structure of a CSP. Additional consideration could be added for the type of industry. Transactions should not be limited to taxable transactions. Compensation should apply to both nexus and non-nexus transactions.

See table:

Some states have said they don't want to pay for non-taxable or exempt transactions. The cost of compliance for a company that sells non-taxable goods or services and/or sells to exempt individuals or organizations is more than the cost for companies selling taxable goods and/or services to organizations that don't qualify for exemptions. The research and configuration of the goods and services rules as well as the maintenance of the exemption certificates is costly. There is also a significant benefit to the states by ensuring these companies remain in compliance and in eliminating the need to audit these companies individually -- the states can audit these companies collectively through the service providers.

SST member states are divided on the issue of compensating CSPs for sellers with existing nexus. The changes made to state statutes to conform to the Streamlined Sales and Use Tax Agreement (SSUTA) has caused uncertainty and confusion, and an increased administrative burden for small businesses. STMS eliminates the confusion and burden.

If policy makers want to exclude specific industries, a compensation model can be utilized to this end. To exclude food, clothing, and medical equipment industries, compensation should exclude non-taxable transactions. To exclude government contractors, companies who specialize in providing goods or services to schools or non-profit organizations, or wholesalers, again, compensation should exclude nontaxable transactions. To exclude small businesses, either have a single tier, or a tiered structure that pays CSPs less for businesses that fall into the lower tiers. To exclude larger businesses, reduce the rate in the higher tiers. Finally, to exclude "Main Street" merchants and small businesses who have limited geographic reach, exclude compensation for those sellers with existing nexus.

Conclusion

The question of whether or not small businesses should be exempt from collecting taxes is a political issue outside the scope of Avalara's control. The real question is whether or not a solution exists to enable easy sales tax collection for all business, regardless of size.

A simple, easy to use system that overcomes the myriad of complex decisions for any company making an effort to be compliant is a good thing. Not only does it enable all businesses to be treated equally it doesn't create a penalty for success once an organization surpasses an artificial "Very Small Business" threshold. A side effect of this universal solution is that buyers will no longer favor one seller over the other based on specific jurisdictional preferences.

A Sales Tax Management Service (STMS) can easily automate the calculation, reporting and remittance of sales tax for any business. However, it is especially effective to reduce the burden of compliance for small businesses. In the last four years, the convergence of Web-based tax management services and secure internet connectivity has enabled low-cost compliance for even the smallest companies.

STMS has changed the landscape of sales tax compliance and makes ubiquitous a practical, affordable, and effective approach for companies of all sizes. STMS makes it possible to collect the taxes and fund public services needed by constituents in the member states where they reside, unlike any other alternative and for even the smallest companies in the United States.