Although taxes are one of the few certain things in life, e-commerce companies have faced significant uncertainty and confusion deciphering when they must apply sales tax. For years, e-commerce companies have not be required to charge sales tax to consumers in states where they did not have a physical presence (e.g., a store, distribution center, or sales representation). In lieu of sales tax, consumers are required to report online purchases and remit a “use tax.” The cost associated with regulating the payment of use taxes is impractical, however and states have not enforced the requirement.
But in an effort to collect the estimated $23 billion in loss tax revenue, many states have recently passed laws to require e-commerce companies to charge sales tax by broadening the definition of “physical presence.” For example, in New York physical presence includes having “affiliated persons” who solicit business, make deliveries, or have an interest in the business. This so-called "Amazon tax" is being implemented on a state-by-state basis, making it difficult for companies to navigate the patchwork of regulations.
Congress has proposed the Marketplace Fairness Act (“MFA”), which would require all remote retailers with sales in excess of $1 million to collect sales tax in every state they have consumers. The bill, however, has stalled in Congress after passing the Senate last year and faces opposition from those who suggest it is burdensome and overcomplicated—two goals the MFA was designed to alleviate. Moreover, in states that enforce the Amazon tax, there has not been the anticipated shift in consumer spending to brick-and-mortar stores and a benefit to local economies.
While debate over online sales tax continues at the national level, here is a short list of considerations and suggestions to help small businesses navigate sales tax compliance today:
- Determine where your business has established a nexus—a connection between your business and a taxing jurisdiction. This requires an analysis of each state’s particular tax regulations to understand what constitutes a physical presence. Currently only 5 states—Alaska, Delaware, Hawaii, Montana, and New Hampshire—do not have sales tax, while 22 states (and counting) have implemented some version of the Amazon tax.
- Once you assess whether you are responsible for sales tax in a certain state, you must calculate the tax rate of each jurisdiction. There are approximately 10,000 different local jurisdictions that charge varying tax rates. Accurately determining your payment presents such a challenge that some companies are devoted to developing sophisticated software to compute rates.
- Mistakes can be costly. If a state determines that you've failed to charge customers sales tax and remit it to the state, you could owe the back taxes in full.
- Get help! A tax law specialist can help guide you through the changing landscape of sales tax compliance. Enlisting a lawyer saves you significant time and resources, which allows you to focus on generating profits without worrying about the risk of an audit and a big bill.
Priori has network of vetted and affordable tax attorneys to help ensure sales tax compliance. Sign up for your free consultation today!