46 Tax Audits from Hell

Blog Articles · Apr 23, 2013 · Taxes

Nothing strikes more fear in heart of employers and employees alike than the dreaded audit. Under a bill working its way through the Senate, audits could become commonplace for many small, online businesses. With the way the bill is going to work, people are going to end up calling it the Tax Audits from Hell Act of 2013.

Under the so-called Marketplace Fairness Act, online retailers would become tax collectors for faraway governments thirsty for more revenue. But because complying with America's 9,646 different taxing jurisdictions is no easy task, the threat of audits would become a stark reality. In an attempt to streamline the inevitable avalanche of audits, the bill sets up:

a single audit of a remote seller for all State and local taxing jurisdictions within that State;

In practical terms, that means online businesses will face the threat of 46* out-of-state audits. And while the bill attempts to limit the liability of inevitable software errors, the risk of a multiple audits cannot be ignored. Even the New York Times' Andrew Ross Sorkin who favors the bill shudders "about the prospect of an out-of-state tax audit."

A few examples.

Reuters profiled Wayne Johnson, who runs an Idaho-based fly fishing retailer called Anglers Habitat. Run through eBay, the business generates about $2.5 million in annual sales. When they voted in favor of the bill, did Idaho Senators Mike Crapo and Jim Risch know a tax bureaucrat appointed by New York Governor Andrew Cuomo could audit Mr. Johnson's business?

Nebraska's Todd Dickie owns Powersports Nation, "largest used ATV parts store on the internet." When they voted in favor of the bill, did Nebraska Senators Deb Fischer and Mike Johanns know a tax bureaucrat appointed by Maryland Governor Martin O'Malley could audit Mr. Dickie's business?

Brian Duda's Alabama-based Duda Diesel offers same day shipping on alternative energy supplies for do-it-yourself users. When they voted in favor of the bill, did Alabama Senators Dick Shelby and Jeff Sessions know a tax bureaucrat appointed by Massachusetts Governor Deval Patrick could audit Mr. Duda's business?

As retiring Sen. Max Baucus (D-MT) explained, the bill "forces small businesses to hire expensive lawyers and accountants to deal with the burdensome paperwork and added complexity of tax rules and filings across multiple states."

Of course, large businesses already have expensive lawyers and accountants on hand. In fact, a 2010 study on the top 20 "E-Trailers" found 15 of those retailers paid sales tax in 44 or more states. NPR reports another, Amazon, "is already facing a big tax collection requirement as it develops its next-day-delivery service."

This is not a compliance burden for major online retailers; this is a compliance burden for the small businesses. Do Republicans Senators really want to go back home and tell their small, online business owners they need to prepare for 46 more auditors?

* The out-of-state audit threat is derived from a 2010 study that counts 47 "states where taxes are collected." That includes 46 with state-level taxes (including the District of Columbia) and Alaska because of "multiple local jurisdiction levy sales and use taxes." We then excluded the home-state compliance burden.