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With all the hoopla over pending new federal legislation that could force many more online retailers to collect sales tax, the legislation also pertains to online B2B sellers. Those companies need to ensure they’re crossing their t’s in tax forms or potentially face tough audits, a tax attorney cautions.
When the U.S. Senate overwhelmingly passed a bill last year designed to let states force a widespread increase in sales tax collection by online and catalog-based sellers, it rekindled alarm among retailers concerned about the cost and liabilities the legislation would bring if passed in the House and signed into law. Retailers are worried about the cost of collecting and remitting tax across about 10,000 taxing jurisdictions and about having to face tough tax audits in any of the 45 states plus the District of Columbia with sales tax laws.
But the bill, known in the Senate as the Marketplace Fairness Act, also carries legal implications for online and catalog wholesalers and others involved in business-to-business commerce.
The wholesale industry, for example, is generally exempt from processing sales tax as long as a purchaser is buying something for resale. For example, if an apparel manufacturer is buying buttons for sweaters that it will then resell to retailers or to consumers, it does not need to pay sales tax on its button purchases. However, if a manufacturer is buying office supplies, for example, for its own use, it would have to pay sales tax, just as a consumer would. There are also numerous industry-specific exemptions from sales tax, such as when an agricultural business buys products for agricultural purposes.
Even when the transaction is exempt from sales tax, however, the buyer is required by tax laws to provide to the seller an exemption certificate, and the seller must be prepared to show that it requested that certificate in order to justifying not collecting sales tax from the customer.
It’s likely many online B2B sellers are not doing that, says Stephen Kranz, a Washington, DC-based partner who specializes in sales tax law at Chicago law firm McDermott Will & Emery LLP. Current federal law says states cannot require an online seller to collect sales tax in states where it does not have a physical presence, or nexus, such as sales offices or distribution centers. Kranz says many wholesalers and other B2B online and catalog sellers may not bother to require tax-exemption certificates from their business customers in states where a company has no nexus, as they may look at the recording of customers’ tax-exemption certificates as an unnecessary chore and expense.
However, if the Marketplace Fairness Act or similar legislation gets enacted, B2B online and catalog sellers will face the same responsibilities as retailers to collect sales tax and remit it to states, regardless of whether they have nexus in a state. “Online and catalog wholesalers will need to care about the Marketplace Fairness Act, because it will require them to gather and maintain tax-exemption certificates,” Kranz says. “They should be doing that today, anyway, to maintain proper records on customers.”
The most common ways sellers run into problems, he adds, is through one-off situations where a buyer with a specific sales tax-exemption either purposely or unwittingly uses it to buy a product not covered by the exemption. That would include a manufacturer buying offices supplies for its own use, or a wholesaler purchasing a computer for an executive. “Most problems are usually not in the resale area,” Kranz says, noting that wholesalers, manufacturers and others usually develop a sound routine for recording tax-exemption certificates from customers who resell what they purchase.
Problems more often occur, he says, when a buyer at a business with, say, a tax-exemption certificate for agricultural purposes, purchases a product like a television that may not obviously have an agriculture-related purpose. It may be hard to justify not collecting sales tax in a state tax audit. Kranz cautions that online B2B sellers need to ensure that their web sites have conspicuous and easy-to-use forms for submitting information on tax-exemption certificates, and that they properly store that information where it can be easily accessed if necessary for an audit.
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