What Does This Mean For Online Retailers?
Not so long ago, states could only tax sales by businesses with a physical presence in the state, think traditional ‘brick and mortar’ store; ecommerce orders that were delivered to the same state of the registered business, or if they had established a nexus in other states for some reason (employees, sales staff, tradeshows, etc. – depending on the laws of each state). However, as of October 1, 2018, the Supreme Court changed the rules and stated that sales tax applies not just to physical presence but to economic nexus presence as well. States now have the authority to tax online sales if a retailer meets certain criteria (and every state is different). This is a big deal for states, many are eager to take advantage of this new freedom and collect much needed funds for their state. As most of you know this has been an ongoing battle for years; and even with the new Supreme Court ruling there is little guidance on how internet sales can and can’t be taxed. Read more about the case of South Dakota vs. Wayfair.
Economic Nexus States:
States that went into effect on Monday, October 1, 2018, are: AL, IL, IN, KY, MD, MN, ND, WA and WI. Additional states will go into effect January 2019, with the rest following suit by the end of 2019.
As of October 1, 2018, the following 14 states had some kind of changes to their sales tax laws. The changes could have been anything from new state-wide tax rate changes, taxability changes and exemptions, or local jurisdiction tax rate changes. These 14 states are:
| AL | AZ | AK |
| CA | GA | MS |
| NJ | OH | OK |
| RI | TX | UT |
| WA | District of Columbia | WY |
Do You Have Economic Nexus?
Check out the state by state guide to Sales Tax Economic Nexus Rules at https://blog.taxjar.com/economic-nexus-new-states-begin-requirements-october-1st/ to learn more about economic nexus for each state. A number of clients called us this week in a panic because their accountants had not warned them of these new changes. We are encouraging everyone to visit the various links in this article for additional information so you are not blindsided by the recent, and upcoming, changes. We have found the TaxJar website to be one of the best resources on the web and would highly recommend spending some time researching how you are affected.
Cost of Filing Sales Tax:
In order to collect and file sales tax, you need to first register and receive your Sales Tax Permit from each state you will be collecting in. This is very important; as you should not collect sales tax if you have not registered with a specific state. Some states also require you to register your business in their state before you apply for a permit and they may charge a fee. It’s important to understand that EVERY state is different; so don’t assume what you did for your home state is the same for every other state.
The cost of filing is going to vary; depending if you use a service to help automate the process or decide to tackle this yourself in-house. No doubt as you are required to file in more and more states; the cost to use an automated service will probably be less than the time it would take you to manually gather, file and remit to each state. Many of our clients are using a hybrid approach. They are using one of the services mentioned in this article to gather the information, and track potential states that they may need to file in at some point. Then they are manually remitting/paying the returns for the easier states and using the service for the more complex states.
Do You Need to Do Anything Now?
Yes. You need to start collecting sales tax as of October 1, 2018 in the states mentioned above. If you haven’t registered; be sure to register FIRST and then start collecting and remitting taxes.
Those of you who run businesses in California, New York, Florida, Washington, or any other state with multiple tax jurisdictions may already know about, and be using, software services like TaxJar, Avalara, TaxCloud or Taxify to collect and file taxes. These are just a few of the many companies that offer this service.
Automated solutions offered by these companies (and others) are connected to your various sales channels and/or carts. Basically once linked, your data will flow into their system and they become your master database*. This database contains all the different tax rates & zones for every state and you don’t have to worry about updating your tax rates as they change – as the service will do it for you. When your customer checks out and makes a purchase, the cart pings their server, looks up the tax rate, and then adds the correct sales tax amount to the order automatically. The order data is then saved by the service, and you have the option to either use this information to file your own sales tax returns or have the service file the appropriate tax return and amount for you. Many of these services also track the various compliance rules by state and they will alert you when you ‘may’ have a tax liability as you approach an order or sales dollar threshold. *Note: There are a few ways you can link your data with these services; we only highlighted the most common.
We will post another article in the next few weeks to discuss the recent changes at Amazon and how sales tax is handled. Many sellers do not realize they are responsible for setting up sales tax in their accounts; or that Amazon recently started collecting and remitting for certain states – find out which ones in our next post.
Additional Articles/Resources: