Small in-state retailers may win on many fronts, as discussed above, but lose on others. For example, many small in-state retailers expand their reach by teaming with online marketplaces. Under either scenario, as soon as remote sales exceed $1 million, small in-state retailers will have to start filing sales tax returns in many states or stop dabbling in the remote seller sector.

Businesses that do not view themselves as traditional retailers may lose because any business that does more than $1 million of remote sales will have to look at itself through the MFA lens. For example, an internal shared services company (SSC) can provide anything from management functions to IT procurement and delivery. SSCs with more than $1 million of remote sales will have to file sales tax returns wherever they have customers. The following is a brief list of the topics that SSCs will have to explore: Are their services taxable? What states have intercompany exemptions? Are there use tax procedures currently in place that need to be unwound? Does its vendors already charge tax based on ship-to location? Many of these issues would also apply to commercial SSCs whose customers are unrelated businesses.

Large businesses or businesses that have grown through acquisitions may be losers as well because the MFA will require the review of all subsidiaries, no matter how small, how new to the organization and what the long-term entity rationalization plan is. A Fortune 100 company may buy a company that has over $1 million of remote sales and a small traditional nexus footprint without even informing the tax department. Furthermore, acquired companies are frequently merged into a larger entity at some point in the future, but the MFA would require immediate compliance if remote sales exceed $1 million.

The list of potential winners and losers goes on and on. The fairness rationale makes sense when one empathizes with in-state retailers that bear the burden of sales tax collection not currently borne by their remote seller competition. For the tax professional familiar with nexus, the application of the Constitution to state tax and the applicable Supreme Court jurisprudence, the status quo is not per se defective, as it treats remote sellers in a manner that is consistent with tax laws. Dual perspective shows legitimacy in both arguments. With that said, the political theatre in which the MFA and its cousin click-through nexus have played out in is dominated by a few key characters that are multibillion dollar B2C online and brick-and-mortar behemoths. If the MFA were to become federal law, small businesses, start-ups, entrepreneurs and many B2B businesses will have to start filing sales tax returns. There is nothing wrong with proper sales tax compliance, but these other types of businesses need to be aware of the new regulatory requirements the MFA will create.

How Can a State Opt In?
The MFA provides two roadmaps for qualifying:

1) Being a Streamlined Sales Tax (SST) member state; and

2) Adopting minimum simplification requirements.

Streamlined Route

The Streamlined Sales and Use Tax Agreement (SSUTA) is currently 204 pages long. There are 22 full member states and two associate states. To qualify for the MFA, a state must be a full member state. The Streamlined governing board must determine that a state is in compliance with the SSUTA for a state to become a full member state, and compliance means to be substantially compliant with the SSUTA. It is fairly common for Streamlined to rule that a state is out of compliance with the SSUTA, but it is very uncommon for Streamlined to relegate a full member state to associate state status.

If the MFA were to become law, the process of determining full member state status could be the soft underbelly that undermines the SSUTA qualification route, as the many companies subject to the MFA may argue that more objective procedures are needed for such a far-reaching law. To take it one step further, one reason SSUTA compliance is so difficult is because it is 204 pages long and likely to get longer over time. Why would a group of states agree to have 204 pages of model law on the books when there is an easier way?

Minimum Simplification Requirements

To qualify under the MFA a state must:

1) Enact legislation to exercise the authority granted by the MFA, specify the taxes to which the authority granted by the MFA will apply, and identify the products or services to which that said authority will not apply.

While this subsection may have been intended to be innocuous, it seems to provide opt-outs that could undermine the concept of a simplified multistate sales tax system. States could enact new indirect tax regimes in lieu of current sales taxes and call them privilege taxes, excise taxes or gross receipts taxes. These hypothetical indirect tax regimes may not qualify under the MFA and could be used to maintain the status quo or circumvent the simplification requirements of the MFA for targeted types of transactions. The North Carolina privilege tax on manufacturing equipment and the Georgia local excise tax on fuel used in manufacturing are two examples of indirect taxes to which the MFA may not apply. Would taxpayers then have to comply with the MFA rules for one type of sale and the litany of nexus rules and interpretations for items subject to these hypothetical new indirect taxes?  

Why would a state elect to exempt products or services sold by remote sellers from sales tax? A state that exempts services sold by remote sellers in an attempt to target the B2C remote seller industry that directly competes with in-state brick-and-mortar retailers of tangible personal property may be discriminating against its in-state service businesses. While state legislators would never intentionally discriminate against in-state businesses run by voters, discrimination could occur because of this option.  

2) Provide a single entity responsible for state and local sales and use tax administration, return processing and audits, as well as a single sales tax return.  

With a few exceptions, just about every state other than Alabama, Arizona, Colorado and Louisiana already provides a centralized administration and compliance system. There are  exceptions to this general rule, for example, Cook County, Illinois. Generally speaking, most states are in compliance with this requirement.  

3) Provide a uniform sales and use tax base among the state and its localities.  

This requirement may be more challenging for certain states. It is not uncommon for states to have partial exemptions that apply to the state tax component of a rate and allow their localities to impose a local rate. These partial exemptions create an inconsistent tax base. Furthermore, Arizona, Colorado and Louisiana all grant their localities the latitude to differ from the state tax base.  

4) Require destination-based sourcing for interstate sales. 

This is another simplification requirement that will not cause much, if any, change. Just about every state already requires destination-based sourcing for interstate sales. Typically, only the intrastate retailer has to deal with the inconvenience of origin-based sourcing.  

5) Provide information about the taxability of products and services and any applicable exemptions, as well as a rate database.

All states already have information about taxability and exemptions in the form of statutes, regulations, policy statements, private letter rulings, etc., so there's nothing revolutionary here. If the expectation is that states will create a tax decision matrix similar to what Streamlined requires, that does require a small amount of effort and some benefit. The many nuisances of state tax law, the application of impositions and exemptions to specific facts and transactions, and the numerous administrative requirements will continue to exist in the post-MFA world. The main difference will be that a lot more taxpayers will become subject to them. 

A tax rate database will be very useful for all taxpayers, remote sellers and in-state companies alike. 

6) Provide free software that calculates sales and use taxes and files returns. 

This requirement would truly be a major enhancement. The states would have to incur the costs to support the system, but the taxability of products and services will still have to be defined by the retailer. Remote sellers would likely incur some implementation and maintenance costs either in the form of IT personnel, tax resources or consultants. At this point, it is unknown how reliable the free software will be, but the MFA protects companies that rely on certified applications. This really is not a bad deal, unless you are an in-state retailer that has to pay for its own sales tax engine. 

7) Provide a small-seller exception to any remote seller with $1 million or less in remote sales during the preceding calendar year.

To most observers, the $1-million threshold seems to be too low. Even with free software and compliance options available, increased costs related to tax department resources, IT needs and consultants could all seriously affect any small business or startup with remote sales close to this threshold. Remote sellers that make a small amount of sales into a large number of states will be affected the most.

Foreign Taxpayers
Federal tax treaties do not typically apply to state taxes, including sales taxes. As a result, foreign companies doing business in the U.S. could be subject to the MFA. Many of the scenarios discussed above could apply. Foreign taxpayers that have no offices, employees or agents in the U.S. may have to be sales tax compliant if shipments or electronically delivered services exceed $1 million. Sales tax regimes vary greatly from VAT systems, so foreign taxpayers could be affected more than similarly situated U.S. companies.