E-Commerce Sales Taxes in Focus
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).