E-Commerce Sales Taxes in Focus

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There are a few reasons why consumers prefer shopping online rather than in-stores: 1) there are no lines or crowds when shopping online 2) it is cheaper and easier to comparison shop online 3) there is no sales tax when shopping online – or is there?

Over the past few years there has been legislation proposed in regard to online sales tax. While lawmakers claim that enforcing online sales tax could help balance state budgets and fund police, teachers or other needed programs, brick-and-mortar retailers have complained that the lack of sales tax on the ’Net has given online merchants an unfair advantage in the marketplace. However, with the Marketplace Fairness Act looming, merchants may have no choice but to charge sales tax and pay it back to the states soon… 

What is Nexus?

Online retailers are currently required to collect sales tax from customers in their own states; however, Nexus, which is defined as having a significant physical presence in a state, determines whether an online retailer is also required to collect sales tax from out-of-state customers. According to the Supreme Court’s ruling in Quill vs. North Dakota, online retailers must collect sales tax from out-of-state customers only if the retailer has a physical presence within that customer’s state, which includes a temporary or permanent presence of property or people working in that state.

That being said, the definition of Nexus is often times inconsistent between states, which leaves many e-commerce retailers assuming that they don’t need to collect sales tax from out-of-state customers. However, this assumption may be wrong if a business employs anyone within a state or someone who physically enters a state to conduct business, if the business leases or owns any property in the state, or if the business participates in any trade shows that promote its products or service in the state.

Determining Sales Tax

If Nexus determines that your business must add on a sales tax charge for transactions in certain states, the next step is to establish which rate to charge, this is where things can get tricky, because the U.S. has more than 7,500 tax jurisdictions that each have their own exemptions and rules. This makes it very difficult for e-commerce merchants to keep up with sales tax rates on their own, which is why it is recommended that online retailers leverage shopping cart solutions that are programmed to automatically calculate sales tax rates, such as Accurate Tax, Avalara or Exactor, to name a few. That being said, the proposed Marketplace Fairness Act is aiming to simplify state sales tax laws, which will make it much easier for merchants to determine rates.

What is the Marketplace Fairness Act?

The proposed Marketplace Fairness Act will require online retailers, regardless of where they are located, to collect local tax on retail sales. It is important to note that this law actually aims to simplify the state tax codes in order to make compliance easier for remote (e-commerce) retailers, and has even been supported by e-commerce juggernaut Amazon, among many others. The reason why states must simplify their laws is that two Supreme Court rulings, including the aforementioned Quill vs. North Dakota, mention concern that collecting sales tax for multiple states is too difficult for remote retailers.

According to marketplacefairness.org, states that are seeking collection authority have two options for simplifying their sales tax laws:

1) The state can join 24 states that have already adopted the simplification measures of the Streamlined Sales Tax and Use Tax Agreement (SSUTA), which has been developed over an 11-year period by 44 states and more than 85 businesses. 

2) The state can comply with five simplification mandates that are listed in the Marketplace Fairness Act bill. Directives include notifying retailers in advance of rate changes within a state, designating a single state organization to handle sales tax registrations, filing and audits, establishing a uniform sales tax base for the entire state, using destination sourcing to determine sales tax rates for out-of-state purchases and providing free software for managing sales tax compliance.

Online retailers will be required to collect sales tax on all sales shipped to the 22 states that are SSUTA members starting on the first day of the calendar quarter that is at least 90 days after the date of the enactment of the Marketplace Fairness Act. That said, small online retailers will not be required to participate in this tax program. 

The Silver Lining for Small Businesses

The Small Seller Exception within the Marketplace Fairness Act states that an online retailer who made less than $1,000,000 in total remote sales in the U.S. within the preceding calendar year will be exempt from tax collecting requirements. It is important to note that remote sales are defined as sales to customers in states where the retailer does not have a physical presence (Nexus).

 

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4 comments

Megan 03-11-2013 3:11 PM

It would be hugely beneficial for me, as a very small online business operator, if my state would simplify it's tax code. I live in Washington, where every zip code has it's own rate, and the amount owed is destination-based. Essentially, this means I have to pay the sales tax for my customers in my own state, because it's too complicated for me to set up a system that will charge them the going rate within their zip code.

TaxCloud 03-12-2013 12:34 AM

Excellent article! A very approachable overview of a complicated situation, for which Ms. Howen deserves commendation - I know because we write alot about this issue. The only thing I would like to add is that our service, TaxCloud, deserves mention along-side the other providers mentioned in the article - particularly because ours is the only absolutely free service.

RonaldN 03-12-2013 1:27 PM

A Fair and Simple Way to Level the Playing Field for Online Sales.

Apply this immediately to Amazon, Wal-Mart and all online sellers whose gross sales exceed one million dollars a year.

Fine tune the process and then start reducing the annual sales level until EVERYONE who sells anything on the Internet is paying.

1. Eliminate all online sales and use taxes.

2. Impose a Processing Fee (PFE) on every sale made - no exceptions. (This is a fee not a tax.)

3. Every time an online sale is made by Amazon (Wal-Mart, Target, etc.,) a % of that sale is transferred into a holding account. Once the processing fee is deposited in the holding account, it cannot be reversed. PFE is based on the total amount of the sale including processing fees, handling fees, etc.

No matter what Amazon calls it, PFE is charged for the total amount of money the customer pays for his or her purchase.

4. At midnight, the holding account is transferred to a Federal computer.

5. The Federal computer takes the money received and immediately transfers it, less an agreed upon processing fee that pays for the computer, to individual state computers based on a distribution formula agreed to by the individual states.

6. Once this works properly for Amazon, the one million in sales cutoff should be dropped to 500,000 and then to progressively lower amounts. Within a few years EVERYONE selling on the Internet will pay their fair share in processing fees. Since the PFE goes to a Federal computer, anyone trying to beat the system should be charged with a Federal crime and vigorously prosecuted.

If elected officials don't spend the money faster than it is collected, the % should be lowered as more and more businesses begin paying PFE. (Every business selling on the Internet, NO EXCEPTIONS, will pay a PFE.) If you object to paying PFE, for any reason, don't sell or purchase via the Internet.

Cost of collecting and processing PFEs should be minimal for both government and private businesses. You won't need lawyers and accountants to figure out how to beat the system. You sell anything on the Internet and you pay PFE. You try to beat the system and you deal with the IRS or another Federal agency.

Companies who work with affiliates (Amazon) and companies like PayPal who offer shopping carts, would collect a PFE for every transaction. This would eliminate everyone using these systems from the burden of collecting and disbursing PFEs for those sales. (And collect revenue from small sellers who have avoided collecting and reporting sales taxes on their sales.)

Individual states would have a daily stream of incoming revenue. The Federal computer and its SMALL staff would be paid for by an agreed upon processing fee. Amazon and other big corporations would pay their fair share and be prevented from playing games with their books to avoid paying PFE. Each business would decide whether to pass the PFE on to its customers or absorb the fee internally.

Customers refusing to purchase via the Internet would be subject to brick and mortar sales tax rules and fees. Everyone selling anything on the Internet would pay PFE. (Whether or not PFEs would be a business deduction would up to individual states and the Federal government.)

Everyone selling on the Internet should be subject to the same rules and fees; but, they have to be understandable, simple to administer and affordable for all businesses.

This system is simple, easy to implement with our modern technology, and can operate independently of the current complicated sales tax systems that small and big business have to deal with on a daily basis.

Small businesses are not asking for favors, we just want a fighting chance, a reasonably level playing field, and a collection process that doesn't cost more than we can afford.

Ron Nixon

Owner RWR Innovations LLC

Web Design Firm 03-14-2013 6:09 AM

The exception for small business could eventually go away and put a big burden on small businesses.

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