As the holidays near, more and more shoppers are turning to online methods of procuring that special gift. And it makes complete sense. The world of e-commerce opens the buyer up to products that may be unavailable in the local area, and it’s often cost-efficient. With this massive turn in consumer spending, tax systems are struggling to keep up. By now most taxpayers have heard of the South Dakota v. Wayfair ruling that overturned the 1992 Quill case and now imposes sales taxes on retailers with no physical presence in the state, as long as they have a clear connection to state consumers and certain threshold of sales. With this, smaller brick and mortar shops may start to see an increase in their sales again. It will also help local state and municipalities by bringing in more revenue through taxation.
It is not great news for businesses that rely on e-commerce sales, however. Smaller businesses will feel the impact of Wayfair far more than larger companies like Amazon and Overstock.com. These large-scale businesses have been anticipating and preparing for these changes for years. In fact, many of them have already been collecting and submitting sales tax with the assumption that this is where the nation was headed. It is the smaller companies that merely dabble in online or across-boarder sales, that need to bring themselves up to speed on the new regulations and how it will affect them. Likewise, new start-ups that plan to rely on e-commerce need to understand where they will owe taxes, and how much tax they will pay in each state in each year. Small retailers should brace themselves for state and local tax collectors, as well as auditors, to start scrutinizing their operations looking for any missed taxation opportunities.
Since the inception of the world wide web in 1991, online shopping has increased. In fact, even though internet sales were a relatively new idea, in 1992 the Supreme Court ruled on their taxation in the case of Quill Corporation v North Dakota. In the case of Quill, companies only had to collect sales tax for transactions that fell in a specific state where the company had a physical presence – meaning a brick and mortar retail store, employees, warehouse or office building. On the surface, this seems perfectly reasonable. After all, these businesses are not contained within the state and are not benefiting from the state, so why should they pay taxes in the state. However, this meant that a company was free to sell in another state without expense to themselves or the consumer for taxes. When you look at it from this perspective it is easy to see why consumers turned to online sales, and companies looked to cross state lines.
So, then why is sales tax compliance different for small online businesses? The biggest hurdle that small businesses face is the method in which to track sales tax. Sales tax must be tracked at the state, county and municipal levels, with varying rates and exemptions on each level. An increase complication is that many states have a sales threshold that is made up of a monetary or number of sales value, or both. Meaning that sales tax must be collected once the company has passed the threshold amount, but only once the threshold has been passed. Additionally, sales and use taxes are also based upon the buyer’s exemption status. Sellers will be required to collect and retain exemption certificates to support any non-taxed sales. Sales tax is due to be remitted by the seller, even if they fail to collect it from the buyer. Knowing the sales tax rate and when it is applicable is crucial for business owners looking to not pay more out of their own pockets than necessary. Late filing fees are also a large hardship on small businesses that may miss the deadlines in each area. It’s also important to note that not every state has sales tax, and not every state that does has adopted economic nexus as their collection basis. Additionally, some states have destination-based sales tax within each location of the state. Deducting and applying all of these new data points will increase the time and costs associated with tracking, collecting, reporting and submitting these taxes. There are entire companies dedicated to assisting businesses with these items. Additionally, small online businesses will have to bank on their diversity of product to compete with the brick and mortar stores, as they no longer will have the added benefit of reduced cost due to sales tax.
As well as changing the taxation game in the United States, it is believed that Wayfair will pave the way for international sales to be more regulated when it comes to taxation. We often think of taxation as something that resides solely within our borders. Unlike United States income taxes, sales and use taxes are not covered by international tax treaties. This means that a company may be protected from federal taxes based on the treaties established between its country and the United States, but it still may be subject to taxes on the state level. In 2008, New York implemented what is sometimes known as a “click-through” nexus status. This created a presumption of nexus for out-of-state sellers who compensated an in-state person based upon commission. Some states also enacted an “affiliated nexus” statue that creates nexus for companies that have common ownership with an in-state company and engages in activities that expand the marketplace of the out-of-state company. With the Wayfair case defining online sellers as needing to have “economic nexus” in a state, international sellers may be subject to collection of sales tax. Additionally, if an international seller has a warehouse in the United States, such as an FBA warehouse, they will now have to comply with the collection and remittance of sales tax.
Both national and foreign companies will need to start reviewing their sales and determine what system they will need to use to properly charge and submit their sales tax. Additionally, companies must review the regulations for licensing in each state, as the definition of business activity may have changed given the Wayfair changes.