If you think collecting sales tax for 9,600+ different jurisdictions would be complicated, then just wait until you see what happens when you try to apply it to the promotional products industry.
A new law called the Marketplace Fairness Act is quickly making its way through Congress, and it may change the way sales taxes are collected for online businesses. As it stands, online businesses are not required to charge sales taxes to out-of-state customers. The bill seeks to end this loophole, requiring any online merchant whose sales exceed $1 million to collect sales tax during checkout – based on the tax rates of the customer’s shipping address.
The idea behind this bill, which may explain its nomenclature, is that brick-and-mortar businesses are currently at a disadvantage to online merchants because they do not have the same “tax-free loophole.” Since sales tax is not collected by most online merchants, they are able to offer consumers lower prices at checkout for the same products. This bill attempts to level the playing field.
What most people don’t know:
When you purchase something online and you’re not charged sales tax, you still owe what’s called a “use tax” for the county where you use the purchased product(s). Those who buy items out of state (at tax-free OR at lower sales tax rates) simply owe the difference. The problem? Most people don’t declare these purchases, which is costing local and state governments an estimated $24 billion annually.
In other words: this isn’t a new tax. It’s simply a way to ensure people are paying it.
Why it’s a problem:
The debate over this bill revolves around the added burden it will put on small businesses who conduct online transactions. Larger businesses, like Amazon, have already begun to collect sales tax in 9 states and are among the bill’s supporters. Additionally, the economics of scale make it easier for a larger online retailer to absorb the administrative costs that will be associated with such compliance.
On the other hand, eBay, who represents a large number of smaller merchants, remains staunchly opposed to the MFA. Even though the $1 million cutoff would only leave a small portion of its sellers affected, eBay still claims the bill favors larger businesses that are more equipped to handle the added compliance costs. Therefore, they are asking for the cutoff to be raised to $10 million.
The main issue is with the complex nature of sales taxes across the 9,600+ counties in the U.S. simply put, it’s a logistical nightmare for any small business to collect, keep track of, and distribute the taxes. Even though the bill includes a provision requiring compliant states to offer online merchants free software for rate calculation, that’s only a small part of the logistical problem. Bookkeeping and distribution of sales taxes for every represented county in the U.S. is a different ballgame.
Think that sounds complicated? Enter: Promotional products
Sales taxes aren’t supposed to be complicated, but it isn’t always so cut-and-dry in an industry such as ours. That gives us a unique (but not exclusive) perspective on how troublesome this bill could be for some businesses.
Once again, it comes down to the wide variety of laws and regulations that differ greatly from state to state.
Not all of our customers give our products away for free! That makes Quality Logo Products a wholesaler, in certain circumstances. In most states, wholesalers do not have to charge sales tax on items being resold. Instead, resellers can submit proof that they are indeed going to resell the items in question. This comes up often for us when we sell our products to both resellers and retailers within the state of Illinois.
“Retailers and resellers don’t typically have to pay sales tax on wholesale purchases since it’s assumed that the end consumer will pay sales tax on these items at the point of purchase.” - Source: Sba.gov
The problem is, the required proof and regulations for such a sales-tax-free transaction varies widely from state to state. It is rather unreasonable to expect our sales team to learn and keep track of the protocols of 50 separate tax jurisdictions in this manner.
In some states, promotional products can be sales-tax free!
Again, this is not so cut-and-dry. Not only does the law vary from state to state, but this exemption usually comes with a number of restrictions that can include how the products are purchased and/or how they will be used in a promotion. Once again, it’s something we are simply not equipped to determine at the point of sale.
For example, in Massachusetts, sales tax on promotional items is not generally owed when it is a part of a larger advertising service such as graphic/brand design.
“Advertising campaigns in which graphic designs are created and intended to market a client’s goods or services by incorporating the designs into “collateral property,” such as pins, flyers, business cards, or cups. In such cases, the transfer of the collateral property is not taxed because it is considered an inconsequential part of the overall transaction.” – Source: ct.gov
Florida is another example of how complicated this can get. How the promotional items are used largely determines whether they are subject to sales tax. For example, if a promotional product is given away as a part of a larger purchase where sales tax is going to be collected, then the giveaway is not subject to a sales tax.
What about a giving a gift with the purchase of a different item? If a retailer provides an extra item or gift to a customer at the time of (and in connection with the sale of) taxable merchandise, then the extra item or gift will be considered a part of the sale. Therefore, sales tax would apply to the actual sales price paid by the customer. The retailer would not be required to accrue use tax on the cost of the extra item or gift. However, if the item being purchased is exempt from tax and the extra item or gift is a taxable item, the retailer is responsible for use tax on the extra item or gift.
Example: A retailer offers a free set of sheets to customers who purchase a mattress set. A customer purchases a mattress set for $999.00 and receives a “free set of sheets.” Sales tax is due on $999.00. No use tax is due on the set of sheets.” - Source: myflorida.com
Sales tax is a tax on consumers, not businesses.
Once again: This isn’t a new tax. This bill is intended to ensure the collection of taxes that have been in place for years. The problem is the entire burden is being put on businesses. And while that’s not an excuse to keep a law that “evens the playing field of the marketplace” off the books, it’s troublesome that this particular bill is being rushed through Congress without much thought to its consequences. Particularly for a nation whose main concern should be to foster economic growth.
We here at QLP don’t have a problem charging our customers sales tax when it is warranted, and our customers don’t mind paying it. We (and I imagine other businesses who ship all over the country) simply don’t want to be burdened with the unreasonable responsibility of doing the job of tax collecting agencies just because it’s become too complicated a problem for them to solve.
How will this bill affect your industry?