WHAT’S IT ABOUT?
The new sales tax rules for e-commerce
States will aggressively pursue additional tax revenue given the new sales tax ruling.
If you sell across multiple states, you may want to anonymously contact the state tax office to find out if there is a look back period, and if so, may want to disclose options for voluntary reporting to reduce your liability.
New Rules of Engagement for Online Sellers
On June 21, the Supreme Court moved to close a tax loophole that essentially gave online shoppers the ability to purchase goods tax-free, thus giving e-commerce businesses an edge over traditional brick and mortar retailers. The Supreme Court’s in its decision on South Dakota v. Wayfair Inc. leveled the playing field, which had long placed brick and mortar retailers at a disadvantage versus their online competitors.
The pre-existing law was a win-win for consumers and online businesses. Americans enjoyed lower prices, the convenience of shopping from home with access to a wider selection of goods from across the country. For example, an e-commerce business based in New York does not have to charge sales tax to a customer in Pennsylvania as long as the New York company does not have a physical presence in Pennsylvania, or what’s called a nexus in the state. In general, a nexus exists if your company has an office in the state, employees, a warehouse or economic ties to that state. Economic nexus means that a business either directs economic activity in a state or has income that it derives from customers in that state. In South Dakota, the state has a two-pronged approach in addressing sales tax. Having substantial economic nexus in South Dakota means crossing a threshold of $100,000 in sales volume or 200 sales transactions. This leaves room for interpretation on a case by case basis.
Beware of the Lookback Period
Over 20 states have already adopted the economic nexus provision and some states like Pennsylvania and Massachusetts have broadened the ruling to include marketplaces, websites that allow sellers to list their products giving them access to millions of visitors. States like California and Texas are currently looking at their existing nexus statutes and may decide to keep what’s in place or follow the lead of South Dakota and other states. The ruling will most likely have little impact on industry behemoths like Amazon and eBay, but for many small online businesses, the new ruling will create tax and filing requirement nightmares as each state applies sales tax differently which may vary across different classes of products. For instance, New York does not charge sales tax on clothing so long as the dollar value is less than $110. In addition, there are numerous jurisdictions that charge local sales tax on top of statewide sales tax.
Given the potential for additional revenues, it is certain that state governments will look to enforce the new ruling. Even before the court’s decision, many states went to great lengths to ensure that businesses collected and remitted sales tax timely and accurately. Businesses that failed to do so faced audits and stiff penalties. For example, Washington has imposed a hefty penalty of $20,000 for failure to report regardless of the sales volume. Washington goes further than most states by imposing a 39% penalty on sales and a lookback period of 7 years. That means that if the state can prove that your business had an economic nexus in prior years, those sales will be subject to fines and penalties.
Amazon May Not Be Your Friend
Marketplaces such as Amazon collect sales tax on behalf of their sellers. Don’t breathe a sigh of relief just yet. Amazon doesn’t always comply such as in the case of Rhode Island which recently passed a marketplace law. Amazon had the option to start collecting sales tax or report their sellers. The company chose to report their sellers. Even if Amazon does collect sales tax on your behalf, you still have to file a tax return such as business and occupancy tax. You’ll also have to collect and remit sales tax if you’re selling on multiple platforms. If you’re selling on multiple marketplaces, it’s a good idea to understand how the platform addresses sales tax, but be prepared to collect and remit sales tax as ultimately, the responsibility falls on your business. A marketplace like Overstock.com recently announced that it will start collecting sales tax in all states because the company believes that all states will eventually impose economic nexus provisions. However, lesser-known marketplaces may not provide adequate tools for managing and remitting sales tax. Be sure to do your homework when deciding to list your merchandise on lesser-known marketplaces.
Even if you are a seller outside of the U.S., you still have the same legal obligations of domestic sellers if they meet the same thresholds. As with domestic sellers, states can impose estimated assessments giving international sellers 30 days to pay. Noncompliance can have dire consequences. The state can go so far as applying a levy on a seller’s accounts receivable, placing a lien on inventory or the company’s bank account.
Resources & Tips
While the prospect of collecting sales tax from multiple jurisdictions may seem harrowing for many small e-commerce businesses, there is help. TaxJar is one of several online providers that helps e-commerce sellers manage sales tax and is trusted by more than 10,000 businesses. The company provides tools to help manage your sales tax obligations by state and will even assist with filing. Before considering whether you should register in a state, you need to determine whether you have a physical presence in the state such as an employee or a warehouse. Next, establish whether the state has an economic nexus provision, and if so whether your company has triggered the threshold for collecting and remitting sales tax. In that case, you need to charge the appropriate sales tax to your in-state customers, collect and send it to the tax authorities. You’ll have to repeat the same decision process for any other states where you believe there is a high likelihood of a requirement to file. In states where there is a lookback period such as in Washington, you may want to contact the state’s department of taxation anonymously before official contact. Some states offer voluntary disclosure allowing you to reduce the lookback period.