Managing online Sales Tax as Business Goes Virtual

During the Coronavirus pandemic, small businesses have been focused on ensuring employee and customer health and safety, while simultaneously, adapting their sales and delivery strategies to keep themselves in business. Both have been very challenging. As businesses shift their selling to the internet, they face new challenges to understand sales tax online.

INCREASED SALES BRING ONLINE SALES TAX ISSUES

Business owners juggle various tax requirements at the federal, state and local levels: sales taxes are just one type. Sales taxes are not charged federally but instead regulated by states. They are considered a pass-through tax collected from the customer and then paid out appropriately. Consumers are certainly aware of sales tax when they buy goods and services, but probably don’t have an appreciation for what retail businesses have to do to comply with these rules. An online store is equally responsible for collecting and paying taxes according to state and local specifications.

In our recent blog article, we wrote about how COVID-19 has caused sales to shift online. As a retail business owner you may have taken your business online for the first time or increased your existing online channel. As an established ecommerce merchant, you may have experienced increased online traffic and conversions as well. Across the board, with the COVID-19, growth in ecommerce has exploded–online sales are up 40% since February. 

If you are a business owner participating in this online sales growth, you are probably also facing new tax administration issues related to those sales. Inevitably, with increased sales comes increased, and potentially unanticipated, internet sales tax issues. You may have taken your business online to meet the needs of local or existing customers, but operating online opens your business to new customer bases across the county. This is great for revenue and growth, but calculating (and paying) different sales taxes by state may now be an added responsibility.

HOW DOES SALES TAX WORK ONLINE?

Back in the day, when you operated on Main Street, bought supplies from the local mill and sold goods to your neighbor, charging and paying a sales tax was pretty straightforward. Taking Main Street online brings a whole new set of taxation issues, and it is the responsibility of the merchant to determine the sales tax obligation for every state where sales occur. Merchants are accountable for the rules both where their business is physically located as well as where their customers are located. Understanding online sales tax rules and keeping track of each state’s (changing) requirements can be overwhelming.

A company’s state sales tax requirement is determined by the company’s nexus (taxable connection or activity) in that state. In previous years, companies were obligated to pay sales tax in states where they had physical operations such as a headquarters, sales office, warehouse, etc. But when it comes to online sales, a company can be located in one state but earning most of their revenue through sales in others. States woke up and realized that they were missing a major taxation opportunity. In 2018, the Supreme Court ruled, in South Dakota v. Wayfair, that states can now impose online sales tax obligations for ecommerce payment merchants based on their own definition of nexus. This is a sales tax game changer that was only starting to impact online businesses when the COVID-19 pandemic hit. But now that ecommerce sites are growing and many other businesses are shifting online, merchants may be unknowingly opening up an ecommerce sales tax can of worms. 

Since 2018, the states have been racing to update and implement their nexus tax laws. There are five states still that do not collect state sales tax, but the 45 remaining states have created 45 different sets of online sales tax rules that are subject to change at any time. According to CFO Dive, “In Mississippi, for example, economic nexus is triggered if you sell $250,000 or more in the prior 12 months; in North Carolina, it’s $100,000 or at least 200 transactions in the past calendar year.” There are also states that collect tax for online referrals and even those that have provisions for collecting based on how sites use cookies. All of this can create an incredibly complicated business environment for online merchants.

USING AUTOMATION TO HELP

The internet is full of resources to educate business owners about online sales tax. However, for many merchants, managing sales taxes on a day-to-day basis can be very time consuming. According to Avalara, “Managing sales tax manually can eat up an astonishing amount of time — an average of 460 hours annually, or 11.5 weeks, for many companies.” As tax laws in all states change constantly, the time spent keeping up with tax obligations could be daunting. As a business owner, you certainly want to focus on growing revenue without worrying about changing tax laws…especially now when there are so many other issues to be concerned about. 

Many businesses get by using their existing business software. ERP solutions, for example, include modules for calculating and reporting ecommerce sales tax. Sophisticated ecommerce platforms can also calculate sales tax down to the zip code level. However, with the changes since 2018, as well as the potential for rapid changes in the future, this may not be enough to effectively manage your collection and remittance.

Depending on your situation, you may be ready to consider an automated tax solution. The best software will integrate with your online shopping cart as well as other business software (such as ERP systems) you may already have. One option is Avalara. Our own eCommerceCart integrates with Avalara, as do others. If you are interested, you can try this free Avalara Sales Tax Risk Assessment to help determine your sales tax nexus or use this link to access three months of tax automation at no cost. See the link for full details on the offer.

Unfortunately, there’s no vaccine for online sales tax. It’s here to stay. To ensure you’re compliant in 2020 and beyond, talk to your ecommerce and accounting teams. Perhaps this is the year you’ll automate that piece of your business to save your company time, money and headaches.