Know Your States — and Their Sales Tax Laws
Walk around any neighborhood and on just about every front step you’ll see boxes containing merchandise that was purchased online. What you see has everything to do with sales tax laws.
Consumers consistently turn to online shopping. It’s convenient and is often less costly than buying from a brick-and-mortar store. For years, sales tax laws didn’t cover online orders. Forty-five states collect sales taxes on in-person purchases but couldn’t apply them to online ones – until now. A 2018 U.S. Supreme Court ruling now gives states collection rights for online sales tax. This was the result after South Dakota sued the online retailer, Wayfair.
The court decision almost immediately filled states’ coffers. Twenty-three states saw a five percent increase in year-over-year sales tax during the third quarter of 2019, according to a study by the nonprofit Urban Institute. The study attributed most of that growth to the new online sales tax laws.
While a boon for state budgets, online sales taxes have stressed small business owners. The internet opens the door to customers beyond a business’ geographic reach. The varying rates and rules for each state’s online tax is, understandably so, a source of confusion and frustration.
Getting Caught in a Nexus
Before the Wayfair ruling, a state could only tax companies that had a physical presence within its borders. But now, economic activity in a state – the “economic nexus” – can trigger an online sales tax. This can happen even if the business has no physical presence there.
Many small business owners feel as if they’ve been sucked into a complicated nexus of varying rules and expectations. That’s because what is subject to the online tax and what is owed differs from state to state. Some states have uniform standards for companies to follow, but other states, usually the big ones, have their own rules to sort through. Further complicating things, Alabama and Louisiana are two of five states that let their municipalities administer their own taxes.
Many small businesses typically lack the staffing and insight to grasp it all. As The Wall Street Journal recently reported, while larger businesses have the people and technology to keep track of online sales in each state and what that means for taxes, small businesses don’t have the means to keep up.
“Small businesses are definitely the ones that are really adversely affected,” Clark Calhoun, a state and local tax attorney in Atlanta, told the Journal. “A bigger business is typically going to have more robust sales-tax software,” he said, and “a better sense of where their products are going and will be well over the sales thresholds every single year.”
You Need a Scorecard to Keep Up
About those online sales thresholds. Some states exempt out-of-state sellers from paying online taxes if they had $100,000 or less in sales or fewer than 200 transactions in the state per year. A few other states don’t have a transaction threshold but have one for total sales. Some states set a $200,000 minimum, while California, New York, Tennessee and Texas set a $500,000 minimum. Kansas doesn’t have one.
The Federation of Tax Administrators, a group that represents state taxing authorities, created a handy chart that outlines the expectations for remote sellers. FTA, however, urges business owners to always double-check with a state in case of any changes.
Small businesses could turn to a marketplace facilitator to handle the sale and the burden of collecting tax. As The Wall Street Journal noted, 38 states and the District of Columbia now have laws requiring marketplaces such as Amazon, Etsy and eBay to collect and remit sales tax on behalf of third-party sellers.
Indeed, those marketplaces could relieve a burden for small businesses, especially with these big online sellers benefitting from a grace period that gives them time to align their procedures with the many state laws. Forbes notes that all but one state with marketplace facilitator laws allows up to three years to be fully compliant with online tax laws.
Do Your Online Tax Homework
Still, not every business wants to put the fate of its goods in the hands of Amazon or eBay. If you’re one of those businesses, having a deeper understanding of the vast online tax landscape should be a priority.
That won’t be easy, though. In the Journal of Accountancy, a publication for CPAs, attorney David Brennan points to how the U.S. has more than 10,000 tax jurisdictions. “While it is possible in some states to register at the state level for counties and municipalities, in other cases the law requires a separate registration in each state, county, and municipality” he wrote. On top of ensuring that they are registered with every possible government entity, businesses also have worry about the many different exemptions to goods. For instance, using Brennan’s example, many states tax the sales of clothing but a few exempt them, while some apply a cost threshold.
Two pieces of advice that Brennan offers to CPAs who represent businesses can also apply to small businesses themselves. First, know your company’s sales and number of transactions for each state and determine potential economic nexus exposure. This requires knowing which products and services are taxable in which states. Also, know the sales tax collection requirement in those states and whether there are any exemptions.
Don’t Go it Alone; Find Expert Help
Even though it’s best to know your businesses’ internet sales inside and out, trying to figure it all out against the backdrop of every state’s expectation might be too much when you already have a long list of financial obligations. You can seek the counsel of an accountant or go a step further and outsource all tax and accounting work to an outside service. Financial services provide not only expert advice but also, more often than not, the latest accounting software. They’ll bring a fresh perspective to your online sales and will already work closely with federal, state and municipal tax and revenue departments.
The expectations and chance of risk are far too enormous to try to handle this alone. Online sales introduce small businesses to a whole new world of customers, but also a whole new world of complexity. As daunting as the vast online sales tax landscape might be, with the right help and proper approach, your business won’t have to sweat the many small details and instead focus on serving your many virtual customers.