For retailers, operating brick and mortar stores in multiple states can be complicated. Tracking sales tax is complicated. States charge different rates. Some don’t charge it at all. Some products may be exempt in one state and not the other.
If you sell online, things get even more confusing.
Thanks to a 2018 Supreme Court ruling, adhering to e-commerce sales tax laws in the states requires a significant amount of planning and work —especially if you’re building your own payment solution.
An understanding of e-commerce sales tax fundamentals is essential to put yourself in the strongest position possible.
The Ruling: South Dakota v. Wayfair, Inc.
A landmark Supreme Court ruling in the case of South Dakota v. Wayfair, Inc. fundamentally changed the sales tax landscape for e-commerce brands.
Prior to the ruling, companies only paid sales taxes to states they had a physical connection (also called a nexus) to. Usually, the connection was because the companies were headquartered in those states.
The Wayfair ruling changed that. Now, states can set new rules to determine whether companies are obligated to collect and pay sales tax. The company’s connection to a state doesn’t need to be physical. The nexus simply can be economical. States can claim, for example, that any company selling to its residents has an economic nexus and is therefore required to pay sales tax.
Not every state has adopted the same rules, however. Some still don’t charge sales tax, and most have vastly different thresholds at which companies must pay.
It gets even more complicated, too, Wayne Rash at PCMag writes:
“According to one estimate I've read, there are actually over 10,000 unique taxing jurisdictions in the US, each one of which can impact both sales tax rates and collection operations from e-commerce activity. Unless the US Congress decides to create legislation that would somehow simplify all of this, your business will have to find a way to deal with compliance, including charging the correct sales tax, maintaining exemptions where appropriate, filing proper business tax returns, and, of course, paying the correct amount of tax to each state and locality.”
The pandemic has further muddied the water for businesses, write Tom Hood and Sona Akmakjian, respectively the executive vice president for business engagement and growth at the Association of International Certified Professional Accountants and the global head of strategic accounting partnerships at Avalara.
Because of the huge surge in online shopping, Hood and Akmakjian write, many more businesses have had to become aware of state thresholds and, if they exceed them, the rules, rates and deadlines that apply.
“Noncompliance is no longer an option either, as states — some faced with budget shortfalls further exacerbated by the pandemic — are making compacts with other states to allow for enforcement and audit efforts, they write. “Businesses, therefore, are in dire need of more than just filing assistance, but advisory services that software solutions can’t provide.”
What Do State Laws Require Now?
The majority of U.S. states have an online sales tax nexus based on both a physical and economic presence. Of those states, $100,000 or 200 transactions are the most common thresholds at which sales tax obligations kick in.
Digging deeper, Bloomberg’s Survey of State Tax Departments notes that Oregon, Montana, New Hampshire and Delaware collect no sales tax. Alaska doesn’t collect sales tax as a state, but multiple local governments collect tax from remote sellers. The remaining states charge sales tax on a physical or economic nexus, or both. Many of those states do not have a tax threshold. For those that do, the threshold typically starts at $100,000.
How to Comply With Sales Tax Laws
The first steps in any e-commerce sales tax strategy include working out where your business needs to pay tax, and then applying for sales tax permits in those states.
Next, businesses must make sure they understand their reporting requirements.
“Both the process of reporting sales tax and the detail of information required varies from state to state,” says Peter Boerhof, VAT director at tax-compliance solutions provider Vertex. “Typically, reporting needs to contain everything from sales per tax rate at line-item level, to transaction details such as customer name, invoice number, and invoice date.”
Be aware of the frequency you need to file reports, too. Most states will require monthly, quarterly or annual returns, though some have less frequent reporting periods.
Cooperating with states is just one side of the coin, however. Antonio Di Benedetto, a tax consultant at ADB Advisors, recommends companies defend against state assertions pertaining to sales tax and petition Congress for clearer rules going forward.
In the meantime, expert advice should always be sought whether you’re developing your e-commerce store or filing reports.