Moylan: Yes, the Marketplace Fairness Act Does Authorize a Sales Tax Audit Bonanza

The so-called “Marketplace Fairness Coalition,” one of a half-dozen groups using big-box retailer cash to organize support of Internet sales tax legislation, sent a very interesting letter last week to eBay CEO John Donahoe. In it, they include one of the best “sort of true but woefully incomplete” statements I’ve seen in a long time. They say

“[The] Wall Street Journal reports that eBay said, ‘this bill allows the state taxing authorities to audit anybody, to question anybody, to go after anybody.’

Unfortunately, this false claim ignores the language of the bill. As we noted above, this legislation requires states to provide sellers with free software that calculates the sales tax due at the time of filing and files state tax returns. And, the bill specifically limits the liability of sellers using the state-provided software.”

First, the true part. Yes, the Marketplace Fairness Act does require states to give sellers software to calculate tax collection obligations. And yes, the bill does limit a seller’s liability in some cases when using that software. Let’s look at how their liability is limited, specifically.

Sections 2(b)(2)(E-H) lay out four limitations for sellers and software providers. Basically, if the software makes an honest calculation mistake, or if the seller or thestate provide inaccurate information to the software, all are relieved from legal liability. Further, states and localities must provide 90 days notice of rate changes and sellers and software providers are protected from liability if that notice doesn’t come.

Now for the woefully incomplete part. Look at what protection the bill does NOT provide. There is no protection whatsoever for sellers that make honest mistakes. If a Mississippi retailer selling into California mistakenly types a 6 instead of a 7 when entering an item code and collects a lower tax rate for the California Board of Equalization (yes, they really call it that) than it should have, that retailer is subject to the full audit and enforcement authority of the kind and gentle folks from Sacramento. If a Texas retailer selling specialty coins into Colorado mistakenly thought that its item was exempt from Colorado sales tax (as “coins” and “precious metal bullion” are, while certain types of paper money and tokens are not) and failed to collect it when the sale was made, they are legally liable and will have to deal with their good friends from Denver.

Make no mistake about it: these types of audits will happen all across the country. The only way to implement the Marketplace Fairness Act is through this sort of cross-state audit and enforcement action (that phrase sure would make our founders shudder, don’t you think?). Without it, sellers could (and some unscrupulous ones certainly would) theoretically fudge the data by claiming that they were selling nothing but tax-exempt or lower-tax items. After all, how would you ever catch them if not through consistent cross-border monitoring and enforcement?

The “Marketplace Fairness Coalition” is wrong for many reasons, but I wanted to highlight this particular bit because it simply cannot be dismissed with the mere wave of a hand in a snarky letter.