Here’s an interesting misconception. Since Congress hasn’t passed an internet sales tax law, online sellers don’t have to collect and remit any sales tax.
Now here’s the bitter truth. Sales tax in the U.S. is governed at the state level, and 45 states and the District of Columbia all have a sales tax. Online sellers with that sales tax nexus (i.e. significant presence) in a state must register with that state’s taxing authority, so the state can collect sales tax from buyers in that state. That’s true today. Tomorrow, should an internet sales tax law be passed, it could get way more complicated.
The specter of an “internet sales tax” isn’t just mystifying online sellers about their current sales tax obligations. If it becomes a reality, it will also create an unbearable administrative burden on the small and medium-sized businesses that can least afford it.
In this post, I explore the current state of sales tax for e-commerce business owners, and give online sellers some tips for handling and simplifying sales tax in today’s regulatory environment.
Internet Sales Tax: Fact and Fiction
Today, online sellers are only required to collect sales tax from buyers in states where they have “sales tax nexus.” A sales tax nexus is created when a seller has a “significant presence” in a state, such as an office or store, warehouse or employees. Note that you always have sales tax nexus in your home state, even if you only work from your kitchen table.
When a seller has nexus in a state, they are obligated by that state’s laws to charge sales tax to buyers in that state. The money collected is used to fund state budget items like roads, schools and public safety. When applied reasonably, there is an element of fairness to this approach, as businesses with nexus in the state use some degree of the state’s resources.
But it’s no secret that most U.S. states are broke. An internet sales tax is one of the creative ideas Congress has put forth to try and drum up more revenue for states. If such a bill were to pass—and there are a couple of them floating around right now—online sellers who don’t have nexus in a state would be on the hook to collect and remit sales tax.
If you already file sales tax now, you can appreciate the potential complexity caused by nationwide internet sales tax. Imagine multiplying that burden by all 44 additional states and the District of Columbia, too. Contrary to its proponents’ claims, such a tax won’t simplify anything. In fact, all it will do is add a cost-prohibitive administrative drain on the small businesses that do an outsized part to drive the U.S. economy.
Fortunately, the current internet sales tax bills aren’t making much headway, as Congress is more focused on the 2016 presidential election.
How Online Sellers Can Simplify Sales Tax Today
Absent an internet sales tax law, there remain a number of challenges online sellers currently face:
1. Collecting the Right Amount of Sales Tax
For e-commerce, some states have origin-based sales tax, where sales tax is charged at the rate of the seller’s location. Most states, however, are destination-based, and charge sales tax at the rate of the buyer’s location. Sellers have to ensure they are collecting the correct amount of sales tax from every customer.
2. Filing Sales Tax Returns on Time
Every state differs when it comes to sales tax due dates and sales tax filing frequency. One state might require monthly filings, while another wants to hear from you annually. Plus, the actual date of the month sales tax is due varies by state. It can be difficult to maintain a schedule when sales tax due dates don’t seem to follow a rhyme or reason.
3. Reporting Sales Tax Collected
When it comes time to file sales tax, sellers must determine how much sales tax they’ve collected on all the platforms on which they sell. This can mean downloading reports from Amazon, Shopify, BigCommerce, etc. To further complicate matters, most states require sellers to break down the amount collected not just by state, but by city, county or other special taxing district—something that commerce platforms don’t provide.
4. Filing Sales Tax Returns Correctly
On top of everything else, every state’s sales tax return is different. You have to remember how to log in to each state account (or dig up an old-school paper form) and properly navigate their arcane websites. Most states even require you to file a sales tax return when you haven’t collected any sales tax during the taxable period.
Fortunately, sales tax automation solutions exist to help businesses tackle these difficulties. In addition to breaking down totals by city, county and special taxing district—just the way the state wants to see the totals reported—some sales tax automation software even files your sales tax returns for you.
Internet sales tax is a bad idea that deserves to die in committee. But until Congress puts it to bed, online sellers can either pay their CPA to handle the complexities by hand or use sales tax software to automatically handle today’s sales tax complexities.