Tax Amnesty and Other Steps to Help Merchants Tame Online Sales Tax Chaos
This post was updated to reflect a vote on Oct. 12 that extended the deadline to apply for sales tax amnesty to Nov. 1.)
As if online retailers didn’t have enough to batten down before the holiday rush begins in earnest, tax specialists have one more thing for them to add to their lists before the madness begins: Conducting a thorough audit of their sales tax responsibilities and systems.
Talk about good times.
But like so much in life, sometimes it pays to just suck it up. Why now? First, two dozen states and Washington D.C. are offering e-commerce merchants a sales tax amnesty that could save some merchants thousands of dollars. The deadline to apply: Nov. 1.
The amnesty is aimed at Fulfillment by Amazon merchants and other marketplace sellers. It’s structured slightly differently in different states and not all merchants are eligible, so look over the details carefully.
You’ll find a useful blog post, complete with webinar, on TaxJar’s website.
Reason No. 2 that dealing with this in October is a good idea? As Jennifer Dunn, chief of content at TaxJar, explains, there are certain things retailers just don’t want to deal with between Black Friday and Christmas Day.
“It gets crazy and you don’t want to have to deal with sales tax,” says Dunn, whose company automates sales tax tracking and filing for e-commerce businesses. “You want to be focusing solely on profit and not on administrative hassles that aren’t going to make you any money.”
When It Comes to Online Sales Tax: It’s Complicated
It’s a wonder that e-commerce merchants want to deal with sales taxes at any time of year. To say calculating how much tax to collect and pass on to various states is complicated is a little like saying the ceiling of the Sistine Chapel has a dope paint job.
“The biggest challenge is just that each state’s rules and laws are different and they were not made for e-commerce sellers,” Dunn says. “Most sales tax laws in the U.S. were created in the 1930s — a lot of them have not been updated to take e-commerce into account.”
Unlike a brick-and-mortar store, which charges sales tax based on its physical location, e-commerce stores must collect sales tax based on the delivery address they ship to and whether they have a legal presence in that state, which is more complicated than simply where the company headquarters is located.
All that means that digital retailers live in a world where there are a mind-boggling number of different sales tax rates that they must charge their customers, depending on where their customers are.
What’s that, you say? There are only 50 states and not all of them charge sales tax, so how many rates could there possibly be?
A lot. Maybe more than anyone can count, because nobody seems to have an exact number. Dunn says Kansas alone has more than 1,000 tax jurisdictions, which is different from 1,000 different rates, but you get the idea.
In all, 45 states and Washington D.C. collect sales tax and 38 of those allow local sales taxes, which can mean taxes levied by counties, cities, school districts, sewer boards, transportation districts, library districts, health districts, mosquito control districts and on and on.
“You’re dealing with the government in kind of the worst possible way,” Dunn says.
And yet, e-commerce retailers want to get their sales tax right — especially during the holiday period. Everything is magnified in the annual year-end stretch, when retailers can make 30 percent or more of their revenue.
Retailers who don’t collect the tax they should and are later audited and billed by some states could see their holiday windfall evaporate. Retailers who do collect sales tax that they shouldn’t could later face angry customers who were improperly charged for the goods they purchased.
Regarding the first problem, Dunn says states appear to be stepping up enforcement. Massachusetts, for instance, recently went to court to compel Amazon to turn over the names of marketplace sellers who are legally responsible for collecting sales tax in the state.
“It’s really only recently that this has been going on,” she says. “States, they’ve been behind, but they are catching on really fast — and states share information with each other.”
Dunn says that a sales tax consultant she talked to recently said that two years ago he received 15 calls about online sellers being audited. Last year, the number quadrupled, she said, to 60. And if history is a guide, states will get even tougher once the amnesty deadline passes.
Six Steps to More Sane Sales Tax Compliance
So, what to do? Dunn, in a webinar earlier this year, recommended that merchants review six crucial aspects of their sales tax responsibilities:
- Know your nexus: Find out what states you have legal presence in. That means the state out of which you run your business, sure. But a legal presence can also be established if you have a brick-and-mortar store in a state. You can have a nexus in a state if you have sales staff or employees in that state. You likely have a legal presence in a state if your inventory ends up in a warehouse in that state, even if you’re working with a third-party logistics firm or a service like Fulfillment by Amazon.
- Understand the taxability of your product: And understand that whether a product is subject to tax can be different from state to state or even depend on how that product is sold. Sometimes clothing and textbooks are not taxable; sometimes they are. A whole bagel in a bag is not taxable in New York, but if it’s sliced and served, it is. In California a printed book is taxable; an electronic book is not; over-the-counter pain medication is taxable; prescription pain medication is not; pine trees are; pear trees are not. You get the idea. And, oh yeah, states change the rules. Bottled water was once non-taxable in Washington state, Dunn explained, and then it was taxable.
- Find out your filing frequency: States have different cadences for filing sales taxes and sometimes the frequency is different depending on an online seller’s revenue. Some states are monthly, some quarterly, some bi-annually, some annually. Keep track of what needs to be filed where and when.
- Determine your filing deadline: Dunn says most states’ deadline is the 20th of the month. But, she says, other common days include the 15th, 25th, 23d and the final business day of the month.
- Track the tax rate in the states where you must file: More likely, “tax rates.” As we said, there are a gazillion different tax rates. Dunn says the total rate is basically the sum of state, local and other rates that apply to the address where an order was delivered. These rates, of course, change from time to time.
- Check your sales channels: Now that you’ve figured out where you need to collect, how your products are taxed, how often you need to file, when you need to file and what rates you’re expected to collect and pay, you need to make sure you apply all that information to all your sales channels. Maybe you sell on your own site and eBay and Amazon and Etsy or some combination. Make sure you’re collecting sales tax from all the sales on all your channels.
If you’re a merchant heading into the holiday season, those six steps should keep you in line and out of trouble. After all, how hard could it be?
Photo of Jennifer Dunn courtesy of TaxJar. Pen and calculator photo by iStock.
Mike Cassidy is Signifyd’s lead storyteller. Contact him at email@example.com; follow him on Twitter at @mikecassidy.