Make Competitors Collect Tax

ThinkstockPhotos 502644390Educated marketers can see when their competitors’ activities establish sales tax “nexus,” and then inform the states so that they can enforce the laws to require tax collection and ensure a level competitive playing field. By Matthew Boch

 

Collecting sales tax is a problem when competing against noncollecting online retailers. Retailers that collect tax need to do whatever they can to level the playing field against noncollecting retailers. While the obvious approach is to lobby Congress for marketplace fairness legislation and lobby state legislatures for remote seller laws, there is another way for tax-collecting retailers to take the initiative: A retailer should monitor noncollecting competitors for nexus-creating marketing activities and then report them to state tax agencies for enforcement.

States Can’t Catch Everyone

It is no secret that state tax agencies are overstretched. Many remote retailers who do not collect sales tax go under the radar with potentially nexus-creating in-state marketing activities like promotional events, sponsorships, and referral-based marketing.

Often, a fast-growing remote seller’s tax function has not kept up with the growth, and the retailer is not well advised of nexus rules or is making calculated risks that it will not be caught. Providing nexus tips to state tax agencies ensures that they are fully informed and can require your competitors fulfill their tax obligations.

Leveling the Playing Field

Imagine this scenario: An up-and-coming online seller has been gaining market share against an established retailer. The online seller collects tax only in its home state. The established retailer’s marketing team sees the online seller sponsor a concert tour, and someone is manning booths on behalf of the online seller at each concert.

Simply copying the online seller’s social media posts yields substantial evidence of the in-state marketing activities. After the tour occurs, the retailer’s outside counsel sends letters to each state tax agency notifying them of the nexus-creating activity by the online retailer. A few months after that, the remote seller switches on the tax in each state that the tour visited. With the tax turned on, the up-and-coming online retailer’s market share plateaus.

Teaming with Tax/Legal

Going on offense in this way requires a partnership between a retailer’s marketing and tax/legal groups. Marketers are on the front lines and know what their competition is doing. They are best positioned to identify their competitors’ potential nexus-creating activities; back-office tax and legal teams just do not have the same awareness of what competitors are doing.

Marketers should understand that essentially any in-state marketing activity that goes beyond traditional media advertising could create nexus, and particularly any in-person promotion or solicitation. This can include:

* Manning a booth at an event;

* Distributing samples or freebies;

* Appearances by sponsored celebrities;

* Visits to potential customers; and

* Online referrals from persons in the state (commission-based marketing).

A retailer with a properly educated marketing team can keep an eye out for noncollecting competitors’ marketing efforts and provide that information to the retailer’s tax and legal team to evaluate.

Use Professionals to Disclose

If it appears that the competitor has established nexus but is not collecting, the retailer can engage a law firm or accounting firm to provide the relevant state tax agency with a dossier documenting the nexus-creating activity. The communication cannot be traced back to the retailer. States are highly receptive to receiving well-documented nexus information. It makes it easy for them to go after the remote seller for failing to collect sales tax.

Once the state tax agency has the information, taxpayer confidentiality means that the informer does not know what they do with it. State tax administration moves slowly, and the process will take months, if not years. You will not know whether the state found other evidence of nexus or whether the online seller will pay any back taxes. But the informing retailer can monitor the online retailer’s website and see if and when they begin collecting tax in a state, likely as a result of the effort. A small investment of time and resources can thus remove a competitor’s unfair tax advantage.

Matthew C. Boch is a nationally recognized multistate tax attorney with Dover Dixon Horne PLLC, whose practice includes advising retailers and other businesses on tax nexus issues. 

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