Archive for January, 2020

Small Businesses Challenged by Online Sales Taxes

January 10, 2020

With the New Year comes an added headache for small businesses engaged in eCommerce.

Given permission to levy local taxes on goods bought on the Internet, many cities and towns across the nation are now requiring merchants to collect and remit those monies.

Although the decision was made 18+ months ago, many smaller companies are just now waking up to the fact they will be liable for levies.  Prior to the ruling, companies relied on the fact they were not domiciled in the various states and therefore did not need to add state and local taxes.

That all went away in June 2018, the five-to-four Supreme Court decision in the South Dakota v. Wayfair Inc. case, states were given authority to order online retailers collect sales tax even if the companies didn’t have a physical presence within a state, such as a store or a warehouse. 

So if your company does business across state lines, it’s a good idea to reexamine your sale tax collection.

There are exceptions.

The Supreme Court said in an issued statement at the time of the decision:  “a business with one salesperson in each state must collect sales taxes in every jurisdiction in which goods are delivered; but a business with 500 salespersons in one central location and a website accessible in every state need not collect sales taxes on otherwise identical nationwide sales”.

Complicating the process for smaller businesses, the items that get taxed and the frequency each is taxed varies from state to state. Some states allow city and local administrations to apply additional taxes.

Certain states have enacted economic nexus standards, which requires businesses that have a selling connection to that state other than a physical presence to collect sales tax on remote commerce. These states include:

  • Alabama
  • Hawaii
  • Illinois
  • Indiana
  • Kentucky
  • Maine
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Mississippi
  • New Jersey
  • Nevada
  • North Dakota
  • Ohio
  • Oklahoma
  • Pennsylvania
  • Rhode Island
  • Vermont
  • Washington
  • Wisconsin

Also states that have enacted economic nexus standards, you should be conscious of the different states’ thresholds for economic nexus.  TaxJar offers insight into the gross revenue thresholds, which, if retailers hit, make them subject to sales tax collection laws.

Small businesses are definitely the ones that are really adversely affected, bigger businesses typically have more robust sales-tax software to manage tax collection.

Verenda Smith, a deputy director of the Federation of Tax Administrators said that state taxes weren’t meant to impact small businesses. Though, she noted that “the fairness issue is equally on the table, and it can be at odds with the burden issue.”

Some states are jumping in to alleviate the burden and address fairness.  In South Dakota, where the case took place, small businesses that make less than $100,000 in sales or have fewer than 200 transactions are exempt from out-of-state taxing. Other states such as California have followed suit, but have differing monetary thresholds.

Additionally, 38 states and the District of Columbia have enacted the Marketplace Fairness Act, which requires e-commerce giants such as Amazon and eBay to collect and remit sales tax for its third-party sellers.

“These bills require out-of-state retailers that have contracts with “affiliates”— independent entities within the state who link to an out-of-state business on their website and get a share of revenues from the business—to collect the state’s sales and use tax.

But, despite moves to alleviate tax burdens from small businesses, some online retailers are hurt when customers abandon carts after sales tax is applied to their total – a behavior that has become commonplace due to many consumers not having to pay out-of-state sales tax for over two decades of online shopping.