How To Avoid Collecting Internet Taxes Under The Marketplace Fairness Act of 2013

internet tax collector

Uncle Sam wants you to be an Internet tax collector for 7,645+ state and local governments

Although tax evasion is illegal, tax avoidance is okay. If the Marketplace Fairness Act of 2013 becomes law (it was passed in the U.S. Senate this week), there’s no reason your online business should become an involuntary tax collector for the welfare state even if the so-called “Amazon tax” is constitutional (debatable).

Fortunately, there’s a big loophole in the Senate version (S.743) of this Internet tax legislation that small businesses can use. It’s likely that any version of this bill that passes the House will expand the loophole rather than reduce it. In fact, eBay is lobbying to make the loophole 10 times larger than what passed the Senate.

What is this Internet tax loophole?

Sec. 2(c) – SMALL SELLER EXCEPTION. A State is authorized to require a remote seller to collect sales and use taxes under this Act only if the remote seller has gross annual receipts in total remote sales in the United States in the preceding calendar year exceeding $1,000,000. For purposes of determining whether the threshold in this section is met, the gross annual receipts from remote sales of 2 or more persons shall be aggregated if— (1) such persons are related to the remote seller within the meaning of subsections (b) and (c) of section 267 or section 707(b)(1) of the Internal Revenue Code of 1986; or (2) such persons have 1 or more ownership relationships and such relationships were designed with a principal purpose of avoiding the application of these rules.

There you have it. In some instances you can avoid being an Internet tax collector under the misnamed Marketplace Fairness Act by having less than $1 million gross sales annually. And under limited circumstances, you can evade this threshold by splitting your business into separate entities if the main reason for the split is not evading the tax collection requirements. If you decide to make structural changes to your business, such as splitting into separate entities, you’ll want to work with both your Internet lawyer and your accountant to make sure you do it correctly so that you don’t cross the line from legal tax avoidance into illegal tax evasion.

Remember, there is still time to kill this federal Internet tax legislation.

Just because some sleazy Senators circumvented the Senate’s own rules for considering such legislation to ram it through without fair hearings doesn’t mean the U.S. House of Representatives is going to follow the same path. In fact, it appears that, unlike the Senate, the House is going to proceed slowly and actually consider the pros and cons of the proposed federal Internet sales tax legislation (the House version of this Internet sales tax legislation is H.R. 684).

You can contact your Congressman and tell him to vote against any legislation that forces you to become an Internet tax collector for states where your business is not based. In the alternative, you may wish to promote the eBay approach, that is, creating an exemption for businesses that do less than $10 million in gross sales annually or have less than 50 employees. However, remember that it is easier to kill a proposed piece of tax legislation that contains some exemptions than it is to later oppose subsequent legislation that will remove reduce or eliminate the exemptions when the government wants more tax revenues (in the interest of even more “fairness”).

What about existing state Internet tax law?

It’s also important to remember that whether or not this Internet tax legislation becomes law, it won’t affect any pre-existing obligation you have to collect sales taxes from online customers who reside in the state where your company is based. Consult with your accountant and Internet lawyer if you have any questions about this in-state Internet sales tax issue.