If passed, the Marketplace Fairness Act (MFA) aims to subject remote sellers to the sales tax collection obligations of a traditional, in-state seller. More specifically, a business currently must have sales tax nexus in a state before that state can subject that business to its sales tax rules. MFA will do away with this and force the out of state seller to collect and remit the applicable sales tax. As I’ve described in previous posts, MFA has far broader tentacles than just ecommerce businesses. MFA has the potential to impact every business. Let’s take a look at manufacturers that are involved in drop shipments. Here’s a typical situation:
- A buyer in State A calls a seller in State B and places an order for a widget.
- The seller in State B places an order with a manufacturer in State C.
- The manufacturer in State C ships the widget to the buyer in State A and sends an invoice to the seller in State B.
- Neither the seller nor the manufacturer have sales tax nexus in State A where the buyer is located.
In this example, no sales tax is due because neither the seller nor the manufacturer have sales tax nexus in State A. However, the buyer should accrue use tax based on State A’s rate.
Let’s look at this same example if MFA becomes law. Same basic set of facts are present as above, however, the manufacturer in State C that ships the widget to the buyer in State A now must assess sales tax because they are considered a remote seller in State A. Likewise the seller in State B must charge sales tax to the buyer in State A. The seller also must present a resale exemption certificate to the manufacturer in order to exempt the transaction between the seller and the manufacturer. This will create substantial additional effort for the manufacturer to maintain these exemption certificates and for the seller to issue these exemption certificates.
Proponents of MFA point to “free” software that will automate the collection and remittance of tax. I don’t think the free software will work for the manufacturer above who now must collect and maintain exemption certificates where they didn’t need to before. What do you think would happen if state A audits the manufacturer and the manufacturer doesn’t have the exemption certificates? They should expect an assessment whereas before, when they had no sales tax nexus, this would not be a risk for them. I think things could get very messy for a manufacturer involved in drop shipments to multiple states in MFA becomes law.