How to Circumvent the Marketplace Fairness Act Small Seller Exemption Penalty

The U.S. Senate is at it again…they introduced new legislation titled, “To restore States’ sovereign rights to enforce State and local sales and use tax laws, and for other purposes.”  Here is a link to the bill.  This legislation would allow a $1 million small seller exemption.  So basically if your “remote sales” are less than $1 million you are exempt from collecting and submitting “remote sales” taxes.

Free Sales Tax Illustration

After reading the legislation this section stood out at me:

“LIMITATION ON INITIAL COLLECTION OF SALES AND USE TAXES FROM REMOTE SALES-A State may not begin to exercise the authority under this Act—

  1. before the date that is 1 year after the date of the enactment of this Act; and
  2. during the period beginning October 1 and ending on December 31 of the first calendar year beginning after the date of the enactment of this Act.”

How to Circumvent the Marketplace Fairness Act Small Seller Exemption Penalty (would only apply to some companies).

If this bill becomes law some companies could immediately analyze their historical sales to determine if some minor restructuring would be necessary.  You could locate a fulfillment company and identify one product line that you want them to ship and warehouse for you from a certain state.  The state or states you choose would be based on your historical sales.

Hypothetical Example:  Lets say my company only has nexus in Minnesota.  My gross sales are $1.4 million for the previous 12 months.  This includes $200,000 in sales to Minnesota (where I have physical presence).  This brings my “remote sales” down to $1.2 million.  To avoid exceeding the “small seller exemption” in the future (1 year after the enactment of this Act) my business needs to get its “remote sales” for the next 12 months down below $1 million.  Based on my analysis $300,000 of my historical “remote sales” each year are shipped to customers located in the State of New York.   I would merely need to locate a fulfillment center in New York and ship some products to them to fulfill for me when someone orders from New York.  I have now established nexus in New York.   All sales made to New York would NOT be “remote sales” and would NOT count towards my million dollar small seller exemption.  I would then be small seller exempt… my remote sales would be $900,000. I would merely have to start collecting sales taxes in just one more state (New York in this scenario).  Lets say my company shows growth in another state I merely create nexus there next to keep my “remote sales” below the $1 million mark.  A company like mine most likely would just need to start collecting in 1 or 2 other states to stay below the small seller exemption permanently.

Theoretically, I could continue to sell to all small population states without ever collecting any sales taxes for them.  

The physical presence and nexus requirements under Quill should stand.  Tell your lawmaker to oppose this legislation.

Comments

  1. Thomas says

    In my scenario I am NOT creating or adding an “ownership relationship.”. I am merely making a business decision to extend my nexus to one more state.

    David you are referencing in part, “Such persons have 1 or more ownership relationships and such relationships were designed with a principal purpose of avoiding the application of these rules.”

    I would assume adding an “ownership relationship” would be creating another company, LLC or other business structure and hiding your ownership interest to avoid the rules.

    In my former career as a Senior Special Agent with the USDA-OIG-I many of my cases involved people creating schemes to create entities to circumvent the farm payment limitations. There is a major difference in making a sound business decision based on the rules then creating sham entities to hide ownership interest.

  2. says

    There’s no reason this wouldn’t work that I can think of. The sections David from Taxcloud mentions aren’t relevant to this scenario and are only to insure an owner doesn’t create a number of smaller related companies to avoid MFA.

    It’s a very interesting approach which as far as I can tell could be a valid way for companies near the small business exemption level to avoid the MFA.

    Of course there will always be a steady stream of small sellers and foreign sellers who won’t be required to collect sales tax, negating the whole “level the playing field” talking point.

  3. PB says

    Any circumvention that is legal is welcome in my eyes. That is- if the House votes this in, which they won’t.

    I’m glad I kept my citizenship in another country. If it comes down to it, I’ll move to protect my business.

    Inversions are an example of circumventing to avoid taxes. They’re not illegal. You can argue that they’re immoral all day long, but then, so is attempting to sacrifice small businesses to make your businesses succeed.

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