THE GIST (A 1-MINUTE READ)
- The nature of interstate ecommerce changed dramatically in the summer of 2018, when the Supreme Court closed a 50-year-old loophole that once allowed interstate retailers to avoid state sales taxes where the business didn’t have a “nexus,” a physical presence or other reason that qualified the business for a state’s sales tax.
- With the new ruling, online retailers are required to collect sales taxes based on the buyer’s location. Sounds easy enough, right?
- Not so much. Sales taxes differ depending on the state (and, sometimes, the county), as do the filing requirements, and the rules are frequently changing on a state-by-state basis. This makes proper collection and filing difficult for all businesses and a major burden for small to mid-sized ecommerce retailers.
- To navigate this territory, ecommerce businesses need to partner with a financial expert who understands both interstate sales tax and online retail. Unfortunately, hiring a full-time, in-house accountant is prohibitively expensive, especially for small businesses. Instead, companies are partnering with Klein Hall’s team of accountants and business advisors. We have decades of experience in the retail industry and have worked with numerous ecommerce businesses to navigate the ever-changing, ever-complicated world of interstate sales tax. Learn more.
The Full Story (a 5-minute read)
It’s a tough day to be an online retailer. Since ecommerce began, businesses like yours have enjoyed a loophole, which allowed them to sell goods sales tax-free to customers in states where the business didn’t have a “nexus,” a physical presence/business connection meriting the collection of sales taxes.
For example: If you were an online tea store operating out of Connecticut before June of 2018, you could sell chamomile to a customer in Ohio without charging that customer any Ohio sales tax. (Remember: This is assuming your business didn’t have any Ohio-based warehouses, production facilities, etc. to merit collection of Ohio sales tax.) Your goods, made in Connecticut, would therefore be less expensive to customers in Ohio than customers in Connecticut, encouraging customers in Ohio to buy tea imported from other states.
The loophole was a kind of sales-tax paradox. It encouraged businesses that wished to target customers in one state to operate out of another, depriving states of tax revenue they rightly deserved (according to the Supreme Court, anyway). Naturally, as we mentioned, this also gave consumers an incentive to purchase goods out of state – why pay sales tax when you don’t have to? – putting local brick-and-mortar stores at a disadvantage. You can probably see why state governments wanted to sow the loophole shut. In the summer of 2018, they got their way.
The taxation of ecommerce changed drastically on June 1, 2018, when the Supreme Court shut a 50-year loophole that allowed interstate retailers to avoid sales taxes in states outside their nexus (see the definition above, in the “Gist.”) The new legislation requires ecommerce businesses to pay sales taxes in their buyers’ states, which makes proper tax-collection complicated for interstate retailers, particularly small to mid-sized businesses, who typically lack a robust internal accounting infrastructure.
Back to your hypothetical tea company. Before the summer of 2018, you didn’t have to collect sales tax from customers outside of Connecticut, your hypothetical home state. Since June 1, 2018, you have to collect sales tax from every customer, in accordance with their state legislation. If a customer from Ohio orders tea, you have to collect Ohio sales tax on that tea. If the customer is from Texas, you have to collect Texas sales tax, which differs from Ohio’s. (The rules you will follow when filing these taxes and the frequency with which you will file them, also differ.) If a customer from Washington orders a pack of peppermint tea, things get really complicated. Now, you will have to determine the sales tax rules of not only the state, but the county in which the buyer resides, since Washington’s counties have unique sales tax requirements, as of the writing of this post. With the new sales tax legislation, peppermint tea can get pretty complex.
Notice our word choice: “You,” the tea business, are accountable. It’s not the government’s or the buyer’s responsibility to determine, collect and file sales tax. That’s up to you, the business. You have to determine what sales tax is owed. You have to be familiar with the unique tax obligations of 45 states plus the District of Columbia. You have to make that calculation, a calculation that, as you’re beginning to see, is complicated by a number of factors, including:
- Sales tax laws are different for just about every state. There is no federal standard, so you need to take local rules into account.
- States have unique deadlines and requirements for the frequency of filing. Missing a deadline can be treacherous, with late fees and other penalties.
- Sales tax laws are always changing, state-by-state. Since the 2018 Supreme Court ruling, many states have rewritten their sales tax legislation, and some are still in the process of reworking it. You need to keep abreast of the shifting legislation. Easier said than done, especially since…
- You have other things to worry about! You’re an online tea company (or any small to mid-sized ecommerce business) not a tax expert. You don’t have the time to track shifting sales tax legislation. You need an expert. Unfortunately, hiring an in-house accountant is prohibitively expensive.
…So, what’s a business to do?
For small to mid-sized ecommerce businesses, interstate Sales Tax is a complex, high-stakes headache. Hiring an in-house accountant is too expensive. But you can’t afford not to be compliant.
Instead, partner with a financial expert who understands ecommerce and can handle your interstate accounting needs. They will:
- Keep track of specific legislation based on state, county, etc.
- Monitor legislation as it changes.
- Keep meticulous records, including specific filing frequencies, sales information and due dates. This allows you to track your sales and invoices, so you know exactly where your sales come from and can collect accordingly, while ensuring you are following proper filing rules for each state.
- Integrating the optimal accounting software into your Point-of-Sale (POS) system. The right software can account for unique state tax laws and automate the data input process, saving you time and money, while reducing the risk of error.
- Ensure you report the correct numbers, the correct way. Some states require you to break down collections based on local jurisdictions, which makes filing your taxes even more complex.
- File in every state where you do business, whether or not you collected tax in that state. This is a common compliance mistake for small businesses. Even if you didn’t collect tax in a state, you still need to file for that reporting period. Fail to file, and you could be hit with penalties.
At Klein Hall, our accountants, business advisors and financial experts provide comprehensive financial leadership for ecommerce businesses. Since 2002, we have navigated our clients through the shifting retail landscape. Now, as legislation has changed, we’re helping small to mid-sized businesses adapt to the environment and gain a competitive edge. Learn more about our services for ecommerce retail businesses here.