“Streamlining doesn’t work because it relies on the same old broken model of relying on merchants collecting it,” said state Rep. Kevin Ambler, R-Tampa, who has filed legislation that would allow Florida to hire credit card processing companies to collect Internet sales tax on the state's behalf.

Here’s how it would work: When you make an Internet purchase, the company that processes your credit card transaction would automatically calculate and charge sales tax using software developed by a company hired by the state.

The state would recoup the cost of the contracts through the tax collections they yield, said Ambler, adding that specific costs would be determined during the contracting process.

via State weighs collecting tax for Web sales.

The idea to collect use tax (sales tax for out of state purchases) to cover the state revenue gap is not a new one. The idea of having your credit card processor collect the tax is interesting, but do I have my reservations. If you charge use tax from the credit card level, do you have the necessary pieces of data to collect the right amount of use tax? I feel credit card processor is tpp high up on the transaction chain. It really needs to be on the retailer level where information such as billing, shipping, and line item data is required. Is shipping and handling taxed in your state? What line items are taxable and which line items are taxable? Use tax collection needs to happen on the retail level not merchant processor level.

Ambler, who has been researching the idea for several years, said the computer program would be able to make such distinctions. Those complex “algorithms,” he said, are part of what will make the software attractive for use by other states.

You don’t need a special algorithm, you just need the right pieces of data to collect the right amount of tax. You have sales tax software companies like Avalara that can calculate the right tax based on the ship to address. The use tax the buyer is asked to pay must be transparent. Before a sale is finalized, buyer should know there is use tax involved. I would think a Brick & Mortar (B&M) will agree this is a good idea since it levels the playing field.

Of course, nothing is 100% accurate. Whenever a shopping cart submits the address to Avalara for a tax rate, Avalara will either return the correct tax rate or with an error. If it errors out, use backup methods such as zip code or city name. If everything fails, just charge the base state tax. Avalara could then audit that address for future accuracy.

That’s the first step.

The second step is to split the use tax with  the state and tax district. The shopping cart can pass along more data to the merchant processor: 1) total tax collected, 2) state tax collected, 3) district tax collected. For example, on a $100 out of state purchase shipped to Los Angeles the tax is $9.75. $9.75 is the total tax. $8.25 is the CA state tax. $1.50 is the LA district tax.

To reduce burden on internet merchants, the merchant processor (e.g. AuthorizeNet) stores all this information for us. When we have to file use tax, we can run a report on AuthorizeNet that breaks down all the use tax owed to states and districts. By coding each transaction with the state and district within the state, Authorize.Net will know who needs to get paid and how much. All the states and tax jurisdictions need to do is give AuthorizeNet their checking account numbers. The state and tax districts get their money less a processing fee from AuthorizeNet. AuthorizeNet would reimburse merchants 3% for the credit card processing fees we pay on the use tax. This way, the merchant forward only the use tax owed and gives a credit card processing company incentive to cooperate since they are making more money on larger order totals. Finally, any small business that has less than $5 million gross sales per year would be exempt from having to collect out-of-state use tax during checkout.

  • Tom

    http://www.ftb.ca.gov/current/usetax.shtml

    Note: If you traveled to a foreign country and brought items back to California, generally the use tax is due on the purchase price of the goods you listed on your U.S. Customs Declaration less the $800 per-person exemption. This $800 exemption does not apply to goods sent or shipped to California by mail or other common carrier.