Overlooked in the Online Sales Tax Bill: Free Tax Software

Patrick Clark for Businessweek writes: After years of griping from state governors, the Senate is considering another bill that would allow states to collect sales tax from out-of-state sellers. It would close a loophole created by a 1992 Supreme Court ruling that has allowed online behemoths Amazon (AMZN) and EBay (EBAY) to avoid collecting sales tax on many transactions. Unlike previous versions of the legislation, the Marketplace Fairness Act would compel businesses that sell $1 million or more annually in states in which they don’t have a physical location to collect tax on those sales.

Last month, 75 senators voted in principle to support the bill—estimated to add $23 billion annually to states’ coffers—though that’s no guarantee it will become law. (If that’s confusing, here’s a primer.) Yesterday the Senate ended debate on the bill, and its final vote is scheduled for May 6. If it passes, it will face opposition in the House.

What would the law mean for small businesses? The answer varies on a case-by-case basis. For every story about entrepreneurs worried about the added tax compliance burden, there’s another on small business owners who crave the consistency they say the law would give them.

Still, amid all the howling by forces on both sides of the debate, a key piece of the Senate proposal is often overlooked: The law requires states to provide businesses with sales tax compliance software for free. To get a sense of how that will work, it’s useful to read up on the Streamlined Sales and Usage Tax Agreement. The Supreme Court ruling that effectively exempted out-of-state sellers from collecting sales tax argued that the hodgepodge of tax laws in different states made compliance too complex. To try to simplify the process, 24 states signed on to SSUTA.

As part of the deal, the administrative body for the agreement certified six software providers to help businesses voluntarily pay sales tax on remote sales. To keep costs down for retailers, states agreed to pay the software companies a commission of 2 percent to 8 percent on taxes collected. Participating states have collected $1.2 billion in sales tax since 2005, says Craig Johnson, executive director at the Streamlined Sales Tax Governing Board. “If this was really such a burden on remote sellers, you wouldn’t expect them to collect taxes when they don’t have to,” Johnson says.

At least one service provider, TaxCloud, already offers free sales tax compliance software in “Streamlined” states, according to Daniela Saunders, a sales and marketing executive at the company. TaxCloud integrates with e-commerce platforms and calculates taxes at the point of sale, and handles other administrative processes, including filing tax returns. “We expect that if the legislation passes, other states will join SSUTA,” Saunders says. Meanwhile, TaxCloud is talking to states about how to offer software without joining the Streamlined agreement.

Of course, simplicity is in the eye of the beholder. “Someone who hasn’t had to collect the tax up to now is going to look at this as an added step,” says Michael Mazerov, a tax expert at the Center on Budget and Policy Priorities. Still, thousands of businesses have had to collect out-of-state sales tax, and “some version of the software has been commercially available for decades,” Mazerov says. 

(Corrects to show Washington, D.C., didn't sign the Streamlined Sales and Usage Tax Agreement)