The Small Business Administration states, "As a small business owner, you are required to assess sales tax, collect it and pass it on to the appropriate authorities within the prescribed time." The only exceptions to required sales tax laws are raw materials, wholesale items, and sales made to nonprofit organizations.
Last year, the State of South Dakota filed and argued a case that targeted the low rate of consumer compliance with laws that mandate self-reporting and payment of sales tax for online purchases. The annual loss estimated by the State of South Dakota was almost 50 million dollars. The U.S. Supreme Court decision on the case (June 2018) overturned the rule that states could not tax businesses unless they have a physical presence, or nexus, in the state. The result of South Dakota v. Wayfair, Inc. was an expansion of states’ taxing authority that has far-reaching consequences for companies that do larger volumes of national e-commerce business.
Many states have adopted their own sales tax nexus provisions with most aligning their laws with the standard set in the South Dakota v. Wayfair, Inc. case. States are choosing to create South Dakota-style economic nexus laws to avoid the appearance of discriminating against or causing undue burdens on interstate commerce.
The following map shows which states have taken measures thus far:
Trigger Thresholds for Collection Obligations
($ and/or transaction volume)
States like New Hampshire and Florida that don’t have a state tax have expressed concerns that the U.S. Supreme Court decision will require businesses in their states to act as tax collectors for other states. There is more wide spread concern that it is the small businesses which will feel the heaviest impact from the Court’s decision and will subsequently pass on the burden of the expense to consumers. This will make the pricing of products less competitive for smaller online retailers. Some predict that the ruling will prompt some consumers to shop locally but many believe buyers will quickly return to the convenience that online shopping provides. Congress may get involved by passing a bill that would prevent individual states from taxing most remote sales. There is also the possibility that legislation could be passed that would expand state tax authority. In the meanwhile, it is the responsibility of businesses to track changing state nexus laws and to develop compliance plans for each state in which they have or might have sales occur.
Companies that sell and mail small numbers of products across state lines don’t need to be too concerned with the new sales tax laws, given the thresholds shown in the map key above. Businesses that sell larger amounts across states will need to pay close attention to the new regulations and any changes that come along. Different states have different tax laws to begin with. Some have a standard flat sales tax rate while others base it on the city or county the purchaser is in. There are POS systems with integrated accounting software that is capable of processing different state sales tax laws. Software solutions like Shopify, Square, and PayPal will become essential for predominantly online businesses that reach minimum sales thresholds.
Things to consider include: your overall resources – how your business can handle the immediate impact the new laws may have on purchasing behaviors; whether or not it makes sense to continue operating in any states that produce low profits for you; and the nexus in your own state to make sure you are not caught off guard when new tax laws are passed. Many believe that if a purchasing slow down occurs it will not last for long. Consumers are used to the convenience of online shopping with brands they know and trust.
If you do business in a state that has yet to update its laws, you can prepare by understanding your average sales in the area. The South Dakota v. Wayfair, Inc. ruling establishes guidelines that include the minimum sales threshold of $100,000 and 200 sales transactions (annually). While you can expect most states to not test the boundaries too much beyond those numbers, be sure to monitor the sales tax laws for the states in which you tend to do the most business. If you prioritize the states in which you sell the most, the task should be manageable.
There are some common mistakes that small businesses often make in regards to sales tax collection. With careful attention and the thoughtful establishing of prudent practice, you can avoid these compliance mistakes:
1. Neglecting to track the different tax rules for each different state. Keep an updated list of due dates, filing frequencies, and other variables.
2. Incorrect reporting. Because there are states that require businesses to break down numbers based on local jurisdiction, it is extremely important to carefully calculate your collections.
3. Failing to file because you have nothing to report. Most states require reports to be filed regardless of whether or not you collected taxes during the reporting period. It also helps keep you in the habit of regularly completing the paperwork.
Keeping meticulous records is key to understanding exactly where your sales are happening. We all make mistakes and all you can do is deal with the extra forms and penalties that occur if one does happen. Staying informed and organized will give you the best chance of staying out of trouble. And it certainly can’t hurt to regularly work with an attorney and CPA to ensure that all “I”s are dotted and “T”s are crossed.
While the experts at Strategy Driven Marketing are neither CPAs nor attorneys, they are well versed in e-commerce best practices and make the most out of the resources integrated into Squarespace, Shopify and other platforms frequently used. For all of your e-commerce, marketing, and graphic design needs, contact us today!