How sales tax management services handle audits

July 8, 2013

Congress is currently considering legislation to allow states to require online retailers to collect sales taxes. The bill that was passed by the Senate in May, the Marketplace Fairness Act, has raised concerns about how it could affect the way businesses are audited.

At TaxCloud, we handle not only sales tax calculation and collection but also filing and audits for many of our merchants. While we don’t know exactly what future legislation may say about audits, here’s what our experience dealing with audits has been like.

First, a little background: The 24 states that have designated us a Certified Service Provider (CSP) have agreed not to hold our merchants liable for any tax calculation errors, and in the event of an audit, these states deal first and primarily with us, not the business itself. So how does this work?

When one of our merchants is audited, the state begins by contacting us. We act as the intermediary between the state and the merchant. The state lets us know that it will be reviewing the merchant’s transactions and conducting an audit beginning on a particular date, and we in turn notify the seller.

The merchant doesn’t need to provide any additional information at this point, as long as we have complete transaction data. If there is transaction data that we don’t have, the merchant needs to supply it.

During the audit, the state sends any information or document requests directly to us. Occasionally we may need the seller’s help to respond. For instance, if an item was classified as tax-exempt but it’s not clear in the transaction records exactly what the item is, we’d ask the seller to provide a description of the item. The state contacts the merchant directly only if there is evidence of fraud.

If future legislation follows this pattern for audits, it’s good news for businesses: It means that states will go to sales tax management services for data that businesses have traditionally had to supply, so businesses won’t be faced with hosting an audit.


Senate Commerce Committee hearing on Marketplace Fairness Act today!

August 1, 2012
U.S. Senate

Senate Commerce Committee hearing on the Marketplace Fairness Act, August 1 at 2:30 pm EDT

Today at 2:30 pm EDT, the Senate Commerce Committee will hold a hearing on the Marketplace Fairness Act. You can watch the hearing live on the Senate Commerce Committee website. Just refresh the homepage 10 minutes before the scheduled start time to begin automatically streaming the webcast of the hearing.

A notice about the hearing on the Senate Commerce Committee website lists the following scheduled speakers:

Senator Richard Durbin (D-IL)

Senator Michael Enzi (R-WY)

Senator Lamar Alexander (R-TN)

Paul Misener, Vice-President for Global Public Policy, Amazon.com

Steven Bercu, CEO and Co-owner, BookPeople, Austin, TX

Scott Peterson, Executive Director, Streamlined Sales and Use Tax Governing Board

Steve DelBianco, Executive Director, NetChoice Coalition

We’re looking forward to it!


Our hearts are racing (for internet sales tax collection)!

July 26, 2012

As most of our readers are no doubt aware, changes have been happening fast for online sales tax collection. Here are the basics you need to know:

  • A few days ago, the House Judiciary Committee held a hearing on the Marketplace Equity Act (H.R. 3179). Several members of Congress, both Democrat and Republican, testified at the hearing in support of the bill, and an article in the Wall Street Journal proclaimed that “the hearing revealed that a large number of lawmakers had moved beyond the question of the legitimacy of collecting online sales taxes and were focused on how to avoid making the process overly burdensome.” (We have the answer, of course: services such as TaxCloud, which take the cost and complexity out of collecting sales tax online.)
  • Meanwhile, the Senate bill on the same issue, the Marketplace Fairness Act (S.1832), will be the subject of a hearing before the Senate Committee on Commerce, Science, and Transportation next week on August 1.
  • Also, New Jersey Governor Chris Christie has joined the list of Republican lawmakers who support federal online sales tax legislation. He also made a deal with Amazon for the company to begin collecting sales tax on purchases made by New Jersey residents in July 2013, in exchange for which the company will build two new distribution centers in the state. Since Christie is one of the leaders of the Republican party—he is frequently mentioned as a potential vice-presidential candidate—we hope this will put an end to the divisive rhetoric that only Democrats support online sales tax collection.
  • Another sign of the momentum that federal legislation is gathering, news articles on online sales tax collection are proliferating everywhere. A few we recommend:

Retailers, lawmakers revive call for Internet sales tax, MSNBC/CNBC, July 26

Online sales tax effort gains traction at US House hearing, Wall Street Journal, July 24

Proposed online sales tax gaining momentum and foes, FOXBusiness, July 24

Supporters of online sales tax say it’s good for consumers, PC World, July 24

Online sales tax is coming!Wall Street Journal, July 21

Pass the online sales tax! The Washington Post Editorial Board, July 16

Tax break nears end for online shoppersWall Street Journal, July 16 NOTE: FRONT PAGE

States, Congress rallying for an e-sales taxWashington Post, July 8 NOTE: FRONT PAGE

Our opinion: If the bipartisan momentum and support for online sales tax collection continues at the current pace, this issue could provoke a seemingly extraordinary achievement: that Congress can get something done, even in an election year!

This legislation is good for consumers, state and local governments, and businesses. Opponents (primarily eBay) claim the legislation will hurt businesses, but their argument ignores the actual substance of the proposed legislation. The Marketplace Fairness Act S.1832 (and the Marketplace Equity Act H.R.3179) require that states simplify and standardize their sales tax systems and they must provide the software (or services) for retailers to easily comply. We strongly support action by Congress on this issue.


We ♥ Senator Cardin – The most entertaining 108 seconds in online sales tax collection history

April 26, 2012

Yesterday we were in Washington DC to attend the Senate Finance Committee hearing we mentioned a few days ago. We would encourage everyone to watch the video of entire hearing, particularly Professor Walter Hellerstein’s outstanding testimony (time-code 47:50 to 52:47). But we are posting today to tell you about the very exciting portion of the hearing when Senator Cardin (D-MD) asked questions of the witnesses (time-code 84:41 to 91:32). Our regular readers will truly appreciate the last 108 seconds.

We have prepared this unofficial transcript of Senator Cardin’s questions from the video of the hearing.

Senator Cardin: Thank you Mr. Chairman, and let me thank the panelists. I want to talk about one of the major sources of revenues for our state, and that’s the sales and use tax.

Dr. Rubin, I want to focus on the fact of how much of those revenues are not being collected today. It’s been estimated as a result of out-of-state shipments, principally through the internet, that there’s eleven billion dollars ($11,000,000,000) a year not being collected. Now, I’ve got the Maryland number, and the Maryland number is thee hundred million ($300,000,000). Which is an interesting number because the governor is talking today about bringing the legislature back to a special session in May because of a three-hundred-million-dollar gap and is looking at increasing a lot of taxes in our state because we need three hundred million dollars to balance our budget. If we had this sales and use tax, we would have a balanced budget, and there would be no need to bring the legislature back into session.

Which brings me to the Marketplace Fairness Act – trying to establish a level playing field. You can go to a retail store in Maryland. Use your phone to take a photograph of the identification [of a product], then go on the internet and get that product shipped into Maryland and avoid the sales tax. Price might be identical, but you’re avoiding the sales tax. To me this is a matter of tax integrity.

The person who does that is supposed to pay a use tax and I have heard that retailers or internet sellers feel that it is such a burden to have to collect a sales tax. It is a huge burden to ask Marylanders to pay a use tax. So, aren’t we picking winners and losers if [we] don’t take some action to provide for a level playing field?

Dr. Rubin: I am a big fan of there being some action to help coordinate these issues. I think that as more sales get done on the internet or electronically or through catalogs, state and local governments are going to be at a disadvantage. So, congressional action to coordinate this seems like a no-brainer, from my perspective.

Senator Cardin: Mr. Zinman, I see that you’re anxious to respond, I’m going to give you a chance.

Mr. Zinman: I’m just agreeing.

Senator Cardin: Ok, well, good. Let me just pose the question. There’s two issues that are usually raised by those who have asked for delay of federal action.

One is that it’s a little complicated, because of all the different sales and use taxes. I point out that there’s free software available that would assist in the collection of this.

The other is for a small business exception – which is included, by the way, in the Marketplace Fairness Act. I’m not aware of any small business exceptions on the brick and mortar requirements to collect sales tax if you have a facility located in our state. Is there any administrative reason why we shouldn’t be moving forward on this, that cannot be solved?

Mr. Zinman: Absolutely not. If you look at what’s happing with BestBuy – that is even though they’re multi-state, they’re brick and mortar – they’re hurting a lot because of the internet sales because . . . I’ll give you a perfect example. An individual can go to New York and buy a set of golf clubs . . . and he has a place in Florida. He buys an expensive set of golf clubs, and he says ship it to Florida, no sales tax. It’ll cost him $30 dollars to ship those golf clubs down to Florida . . .

Mr. Henchman: Florida has a very high sales tax.

Mr. Zinman: . . .but he’s not paying . . . he’s supposed to pay. I’m not saying what he’s supposed to do. I’m saying what actually happens. What actually happens is, he is not reporting that sales tax in Florida.

Senator Cardin: I haven’t check with Florida’s use taxes, but my guess is there’s not many being filed by individual consumers.

Mr. Zinman: In New York, we have a line on our New York State – and many states have a line on their tax return – asking the taxpayer to voluntarily compute and give back the sales tax they should’ve paid, in the form of a use tax. But you now take a state like Florida, that doesn’t even have a state income tax form to report this – they have use tax forms, they are there, they’re available. But many people who have multi-state residences – I’m just using New York and Florida as an example because that’s a corridor that a lot of people travel. A lot of individuals are ignoring the taxes they have to pay.

Senator Cardin: It’s my understanding that we have a form in our state where you can include the use tax, we have that in Maryland. The three-hundred-million-dollar number I gave you is a net number. I don’t know the exact amount of use taxes that we collect from individual consumers, but it’s minuscule.

Mr. Zinman: I’m sure its minuscule.

(time-code 89:44)

Mr. Henchman: Senator, very briefly . . . I just want to be sure the goal of simplification is not minimized here. Because while that retailer has to collect, and doesn’t get a de minimus threshold, they are only collecting one sales tax. Internet retailers would have to track and collect 9,600 across the country. And yes there is software on the rates, but that software doesn’t help you to distinguish between all the sales tax holidays, and all the different rates on different products.

Senator Cardin: Are you telling me that computers cannot figure this out?

Mr. Henchman: It’s not computers, it’s tracking the states laws . . .

Senator Cardin: I have my iPad. And I’m amazed at what I can put into my iPad and get an answer immediately. Are you trying to tell me we don’t have a computer program that can figure out this issue?

Mr. Henchman: It’s not a question of computer programming, but a question of tracking changes in legislative laws. There’s a lot of . . .

Senator Cardin: And my iPad gets me the up-to-date information on traffic instantaneously. You’re trying to tell me we don’t have that technology available today?

Mr. Henchman: I work at the Tax Foundation. We do our best to keep track of all state and local laws and changes, and it’s difficult for us, and we’re not running a business.

Senator Cardin: Well, I think you better get a better program.

Gallery: [laughter]

Senator Cardin: I find this hard to understand that when you’ve got governmental actions, which are very public actions . . . every time taxes are changed . . . that that can’t be done? I’m not minimizing the issues of simplicity.

Mr. Henchman: The laws . . .

Senator Cardin: And we’ve been talking about this ever since I’ve been in Congress, which is twenty-some years. This is being used as an excuse for inaction! It’s not a problem that can’t be overcome.

Mr. Henchman: To me it’s not an excuse for inaction, it’s an excuse for the right kind of action. Some of the bills you’ve mentioned have very different . . .

Senator Cardin: Well, after twenty-some years, don’t you think it’s time for some action?

Mr. Henchman: I agree, but . . .

Senator Cardin: Thank you. I appreciate your opinion. Thank you, Mr. Chairman.

Chairman Baucus: I like it!

Gallery: [laughter]

Chairman Baucus: That’s good. Good for you guys.

Gallery: [laughter]

Chairman Baucus: That’s how you get information out.

Gallery: [laughter]

Based upon the testimony and statements provided to the committee, we hope Chairman Baucus and the rest of the committee will act quickly to advance the Marketplace Fairness Act.


FedTax Statement Submitted for the Record of the Senate Finance Committee (in support of Marketplace Fairness Act)

April 26, 2012

[Download PDF of FedTax Statement]

Statement Submitted for the Record to

The United States Senate Committee on Finance

Full Committee Hearing

Tax Reform and What It Means for

State and Local Tax and Fiscal Policy

April 25, 2012

 Dirksen Senate Office Building

Washington, DC 20510-6200

Attn:  Editorial and Document Section

Rm. SD-219

Statement submitted by

R. David L. Campbell[i]

Chief Executive Officer

and

Joan Wagnon[ii]

Executive Vice President

The Federal Tax Authority, LLC

162 East Avenue

Norwalk, CT. 06851-5715

Alexander Hamilton wrote in The Federalist in 1788 that “individual States should possess an independent and uncontrollable authority to raise their own revenues for the support of their own wants.”

Today the discussion about state sovereignty over matters of taxation continues unabated. State revenue directors have seen firsthand how the actions of the federal government have affected state and local revenues. Members of Congress are increasingly bombarded by requests for action because state laws are restrictive to business or seen as unfair. There are any numbers of examples where congressional action has been beneficial or harmful to states.

But the issue that has been most devastating to state and local government has resulted from Congressional inaction, rather than action: the failure of Congress to overturn Quill v North Dakota.[iii] 

The Marketplace Fairness Act (MFA), S. 1832, sponsored by a bipartisan group of senators (Enzi, Durbin, Alexander, et. al.) is a good solution to the revenue problems of states, but more importantly, it gives states a better mechanism than they have now to collect the taxes they already levy.[iv]

The MFA also corrects a growing imbalance between groups of retailers. Under the current court ruling, tax is collected on some sales and not on other sales of the exact same items. Why should tax be collected on a book or camera purchased from a local business and not on an identical item purchased from a mail order or internet business?

Remote sales are growing at double digit rates.[v] However, states’ inability to collect sales tax on these sales results in the erosion of the states’ tax bases. Certainly this unfairness is not the hallmark of good tax policy! Congress is creating winners and losers among the retail community by its inaction.

Opponents cite two specific reasons for allowing this unfair situation to continue: a) that remote collection would be overly burdensome and complex, and b) that any systems necessary for remote collection would be prohibitively costly. This testimony will provide technical information for Congress to consider when evaluating those arguments.

I.       The Complexity Argument

Technology has advanced considerably since the 1967 and 1992 Supreme Court rulings that created the current sales tax situation. Even the more recent of these, Quill, occurred before the first graphical browser was invented, before most homes had internet connections, and long before e-commerce forever changed the retail landscape. Today, forty-five years after Bellas Hess and twenty years after Quill, online marketplaces and auction sites easily manage millions of items for sale at any given moment.

Today, keeping track of a few thousand local tax rates and filing requirements is not an insurmountable technical, administrative, or financial burden. TaxCloud, the sales tax management system created by FedTax, proves this point by calculating and collecting sales tax on any purchase for any tax jurisdiction in the United States in less than one second. The service is free to all retailers.

The technologies necessary to create such a system are not new; they are well-established. In fact, they are currently being used throughout e-commerce. They are Application Programming Interfaces and Web Services. An Application Programming Interface (API) allows dissimilar and unrelated systems to communicate with each other using pre-established syntax and structure. Web Services allow APIs to be used for machine-to-machine interactions over the internet. Both are now commonly used in e-commerce—for example, in real-time-shipping, which allows a retailer to provide its customers with accurate, real-time quotes for shipping costs based on at least five variables, including weight, size, delivery speed, origin, and destination. Often customers can even compare shipping costs among multiple shippers.

With APIs, Web Services, and other technological advances of the past twenty years, it is now possible for remote retailers to easily keep track of every state’s tax laws. 

To minimize or completely eliminate the undue burdens cited in Bellas Hess and Quill, more than half of the states with sales tax have worked together for twelve years to create the Streamlined Sales and Use Tax Agreement (SSUTA). These states provide free rates and boundaries databases for all of their respective taxing jurisdictions, and regularly issue updates when rules, rates, or boundaries change. In addition these states also certify and pay for software and service providers to manage sales tax compliance on behalf of retailers.[vi] The Marketplace Fairness Act requires that any states seeking remote collection authority shall comply with SSUTA or provide comparable rates and boundaries information as well as certified software and services that retailers can rely upon to achieve compliance with minimal burden.[vii]

Ironically, those who argue most strenuously that remote collection would be too complex are a few large online businesses that already rely on these same technologies every day, in every transaction. The plain fact is that online retailers operate the largest marketplaces in the world by relying on technology to simplify and automate a host of historically burdensome chores, including payment automation, location-specific marketing, personalized recommendations, and even Duties and Value Added Tax management for foreign governments.

II.        The Costs-of-Compliance or Undue Burden Argument

Opponents also argue that even if technology can solve the technical burden of keeping track of rates, jurisdictions, and filing complexities, such software would be prohibitively costly, particularly for small businesses. TaxCloud is provided to retailers at no cost—so the argument that such software would be prohibitively costly should be flatly disregarded. However, the costs-of-compliance argument also maintains that even if the software is free, businesses will still be burdened with the cost of integrating such software into their existing systems.

This line of argument ignores the reality that all but the very largest retailers rely upon pre-written software and/or online hosted platforms for e-commerce and order management. Retailers rely upon these systems to avoid the costs of developing, managing, and maintaining such systems on their own, costs that are magnified by the changing nature of e-commerce. It is no secret that e-commerce is constantly changing to respond to evolving cyber-crime threats, payments and security industry best-practices, and, yes, legislative requirements. When their retailer clients need to collect sales tax, platform vendors will provide ways for them to do so, embedded within the platforms that retailers already use.

E-commerce platform vendors are intensely competitive and focused; they take pride in not only complying with evolving requirements but often surpassing them, occasionally with stunning results. For example, much of the cloud computing infrastructure now transforming every corner of the technology sector can be traced to several of the largest e-commerce companies adapting to comply with the Sarbanes Oxley Act of 2002. Most platforms already provide basic sales tax management features for their clients. Upon enactment of MFA, these existing systems will quickly be adapted to ensure compliance.

To conclude, modern technology has made it easy for retailers to collect sales tax for any state in the U.S. TaxCloud enables retailers of any size to easily collect sales tax and comply with the provisions of The Marketplace Fairness Act—for free. More information is available at TaxCloud.net.

And in addition to TaxCloud, five other companies are certified by the Streamlined Sales Tax Governing Board and ready to assist when Congress authorizes collection—and no doubt hundreds more will emerge soon after legislation is passed, because the free-market system will provide the incentive for entrepreneurs and innovators to develop these products.

Please don’t wait to enact the Marketplace Fairness Act until all the parts of tax reform are in place. Passing this one bill can be the foundation for future reform as well as provide great benefit to both state and local governments. It also benefits brick and mortar retailers. Creating the same tax collection system for retailers whether they sell online or in a store is only fair.

/R. David L. Campbell/
R. David L. Campbell
Chief Executive Officer
/Joan Wagnon/
Joan Wagnon
Executive Vice President

[Download PDF of FedTax Senate Finance Committee Statement – 4/25/2012]


[i] David Campbell, Chief Executive Officer of The Federal Tax Authority (FedTax), founded the company in 2008. FedTax is a Washington State Limited Liability Company with operations in Washington, Connecticut, and Kansas.  Its management team includes highly experienced professionals who have been directly involved in building some of the most recognizable brands in e-commerce, including MasterCard, Google, WebMD, Microsoft, Expedia, and American Express.

[ii] Joan Wagnon served as Secretary of Revenue in Kansas from 2003 to 2011. She also chaired the Streamlined Sales Tax Governing Board in 2008-9 and the Multistate Tax Commission from 2006 to 2008. She served on the Board of Directors of the Federation of Tax Administrators for 8 years before joining FedTax to work toward the passage of federal legislation granting states’ collection authority over remote sales.

[iii] The notion that out-of-state retailers would find it overly burdensome to keep track of every state’s sales tax rules can be traced directly to the 1967 Supreme Court ruling in National Bellas Hess v. Illinois Department of Revenue. In its majority opinion, the court ruled thatthe many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National’s interstate business in a virtual welter of complicated obligations to local jurisdictions” (emphasis added).

In 1992, the matter of remote sales tax collection came before the Supreme Court again in Quill v. North Dakota. This time, the court reaffirmed the earlier Bellas Hess decision by a ruling of 8 to 1, primarily on the basis of stare decisis. The ruling went on to state, “[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.”

FedTax frequently cites the earlier Bellas Hess quote because it summarizes the ruling’s basis in complexity and burden, which has rippled forward to the present day and created a tidal wave of unintended consequences. This ruling has shielded all out-of-state retailers from the obligation to collect sales tax, based purely on the notion that it would place too much of a burden on businesses. Perhaps it would have, in 1967. That was the year the floppy disk was invented at IBM.

[iv] States typically depend on voluntary means of collecting from individuals, such as a voluntary line on the income tax form. Audit procedures, which are used for businesses, are ineffective for consumers.

[v] On Cyber Monday (the first Monday after Thanksgiving) in 2011, over $1.2 billion in sales were transacted online. On that day alone, approximately $58 million in sales tax went uncollected.

[vi] FedTax has been designated a Certified Service Provider (CSP) by the Streamlined Sales Tax Governing Board specifically for its TaxCloud service. There are six CSPs and 24 member and associate member states.

[vii] Although “software and services” is not defined in the Marketplace Fairness Act, likely it will include Application Programming Interfaces (APIs), Web Services, rates and boundaries databases, and a process for certifying service providers to process returns accurately under state laws.

[Download PDF of FedTax Senate Finance Committee Statement – 4/25/2012]


Alabama takes next step toward joining Streamlined Sales and Use Tax Agreement

November 30, 2011

According to this Birmingham News article, Alabama is taking the next step toward becoming a member of the Streamlined Sales and Use Tax Agreement:

A group created to streamline Alabama’s sales and use tax reporting system for retailers approved a preliminary report Monday, a step toward crafting legislation for lawmakers to consider next year.

The Alabama Streamlined Sales and Use Tax Commission made two recommendations for simplifying Alabama’s sales tax laws, including reducing the paperwork store owners must complete in order to remit sales tax.

Should next year’s expected legislation pass, it will make life easier for Alabama shopkeepers and help prevent budget cuts to state services:

Ely said the proposed legislation, if it’s approved by lawmakers in their 2012 session, represents a win for both retailers and governments because it would make life easier for retailers while raising revenue for governments without raising taxes.

“These poor folks are not only covered up in red tape, but they’re also covered up with auditors,” Ely said.

Sounds like a win-win to us!


Joan Wagnon, FedTax EVP, quoted in Fox News article

October 27, 2011

Fox News: Republicans Go Big With New Tax Structures, but Status Quo Could Stifle Simplicity

Our own Joan Wagnon, Executive Vice President here at FedTax, was quoted in a Fox News article about Republican presidential candidates’ tax proposals.

It’s not the first article she’s been quoted in, of course—Joan’s background in public service includes positions as the secretary of revenue for the state of Kansas, chair of the Multistate Tax Commission, president of the Streamlined Sales Tax Governing Board, and mayor of Topeka. But we’re always happy to see her expertise in tax matters recognized. We trust her opinion without hesitation, and her analysis in the article is once again spot-on.