ISOs should make sure their processors and acquiring banks are preparing to collect internet state and local sales taxes, a vendor tells ISO&Agent Weekly.

The Marketplace Fairness Act, which would require such collections, passed the U.S. Senate 69-27 in May, and an identical bill is awaiting a vote in the House.

If Congress passes the legislation and the president signs it, companies like Norwalk, Conn.-based FedTax will be ready. It promotes a product called TaxCloud, says CEO David Campbell.

TaxCloud automates sales tax collection for retailers, Cambell says.

And it’s not an easy task. It requires keeping up with the nation’s 13,405 tax jurisdictions, which are missing out on more than $23 billion annually in sales tax that isn’t collected online, he notes.

“That’s why Congress is starting to take action,” Campbell says of the shortfall. “They’re being driven by three main constituency groups.” The groups include state and local governments, businesses, and consumers, he says.

Governments are missing out on revenue at a time when recession and conservative sentiments are reducing federal aid.

Online businesses are coping with a patchwork of state laws aimed at collecting internet sales tax. Local brick-and-mortar businesses compete with what amounts to a discount for shopping online and escaping the sales tax.

Consumers are paying higher property taxes and income taxes to compensate for the uncollected online sales tax.

“The uncollected sales tax is the broadest form of tax evasion in U.S. history,” Campbell says. “Less than four tenths of one percent of people actually self-report” the tax to the states, he says.

Most consumers don’t even know they owe the tax, so the system is inadvertently putting them into a situation where they are committing a crime, Campbell says.

But that will change if the Marketplace Fairness Act becomes law.

The law would compel the states to simplify their tax reporting, and taxes would be collected where the purchaser lives, not where the seller has set up shop, Campbell says.

His service, TaxCloud, manages sales tax for every jurisdiction in the country, he says. Retailers pay nothing for the service because the states pick up the tab, paying the company up to 8% of the taxes it collects. The percentage declines as the amount collected increases.

Twenty-two states have already adopted a taxation model that includes paying companies like FedTax for collecting sales tax.

For merchants, the FedTax TaxCloud products takes two forms.

First, for no cost, the TaxCloud website provides the local sales tax anywhere in the country, Campbell says.

But the real service, also free to merchants, automates tax collecting. Merchants can sign up on the site, and within 20 minutes start collecting sales tax throughout the country, he says.

TaxCloud connects with the merchant’s shopping cart for access to collect the tax, Campbell says. The billing address reveals where the tax is due, and the process does not add a step for consumers, he notes.

The product incorporates transactions from brick-and-mortar stores with the online purchases to keep comprehensive records for multichannel merchants. Having that data enables TaxCloud to prepare monthly sales tax returns.

Because the company knows how much sales tax merchants have collected, it can make a single automated clearinghouse debit of its account and holds the proceeds for the states, Campbell says.

“All of this is completely automated, with no effort for the merchant – no checks to write, no forms to fill out,” he notes.

The company, instead of the merchant, responds to state audits, Campbell says.

“That’s our job – to make sure the proceeds get collected, accurately reported and if there are any questions, the states come to us,” he maintains.

For a limited time, the company is offering a commission to acquiring banks, processors and switches that sign up merchants for the tax-collecting service, says Ken Reilly, president of Emerging Merchant Services, or EMS, the company promoting TaxCloud to acquirers. The commission comes to as much as 5% of what it receives from states.

“We’re trying to incentivize the processors and the switches,” Reilly says.

ISOs should make sure their processors are ready to collect sales tax because merchants might switch to other transaction providers if the bill becomes law, he suggests.

“The ISO does not want to lose his account because the bank didn’t have a system in place,” Reilly warns.

Enacting the bill could cause a “tsunami” of industry players trying to get ready to collect sales taxes, Reilly predicts.

That makes this the time to prepare, says Adam Atlas, an attorney who specializes in payments, represents Reilly’s company and has provided advice on TaxCloud.

“The sales pitch is being done now by FedTax so that it can alleviate some of that mad rush that will occur when the thing becomes law,” Atlas says. “This is like PCI except with the force of law behind it. If mom and pop are not collecting sales tax, they could go to jail.”

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