Sales Tax and the Internet Merchant

7/27/2019 Sales Tax and the Internet Merchant

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SALES TAX ANDTHE INTERNET

MERCHANT

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SALES TAX AND THE INTERNET MERCHANTPage 2

Sales Tax and theInternet Merchant

Ecommerce Sales Tax The New Normal?

As federal and state governments turn their attention to capturing more reve-nue from Internet sales tax, many ecommerce businesses are finding themselvesunder increasing scrutiny, and they need to look at the impact sales tax mayhave on their business as they expand into more states.

On a national basis, according to a US Census Bureau survey in 2012, as muchas a third or more of state budgets are derived from sales tax, which helps stateand local governments fund taxpayer services. Internet merchants should under-stand their responsibilities and liabilities as they do business not just in their ownstate, but other states or countries.

We may very well be seeing the beginning of a new normal. This paper will helpyou understand and be prepared for some of the basic requirements around salesand transactional taxes in the ecommerce world.

Nexus Requirements

Every state has the right to define who has to collect sales tax, what those taxes

are, and any exemptions that may be allowed. However, there are limits to howstates can define nexus.

Nexus means a connection. Ecommerce merchants must have a connection to astate in which a customer resides for the merchant to be liable for sales taxe. Butstates define nexus in different ways, and this makes it confusing.

Nexus triggering events can include:

Traveling salespeople

Agents or distributors

Employees on payroll

Training Trade show attendance

Inventory / warehousing

Servicing tangible personal property

Affiliates
http://www2.census.gov/govs/statetax/2012stcreport.pdfhttp://www2.census.gov/govs/statetax/2012stcreport.pdf


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Crossing Your Ts and Dotting Your Is

Once youve figured out where your business has nexus, you need to ensure thatyou are properly set up to collect and remit sales tax within applicable states.To do that, youll need to register with the state(s) in which you have nexus bydeclaring your business. With each state you will need to:

1. Get your ID number by setting up an account with a state, and visit theirlocal .gov website to determine the exact steps. Usually they will have youfile a form and register.

2. Once that is complete, you will have a unique code applied to yourbusiness, and this code will show up along with your business name in all

future sales tax filings.3. As soon as you have completed your paperwork, make sure to check that

same regulatory department for up-to-date rates and tables, rules andboundaries. It is also critical to set up your ecommerce shopping cart withthe appropriate rates in each of the states in which you have nexus.

4. Set either mixed, destination or origin sourcing rules to make sure you arepaying the tax in the right place.

5. Research the taxability of your items, making sure to apply thresholds andtax holidays if they apply in your state.

6. Make sure that you only have to file one sales tax form in one state, asmany states require remittance to local jurisdictions (which can number in

the hundreds), as well as the state.7. Consult a sales tax professional, as laws are complex, ever changing and

not fun!

Accuracy is Everything

Sales tax is calculated based on specific laws, regulations and rates defined forstate, city, county, and in some cases special taxing jurisdictions and RegionalTransit Districts. Sometimes, sales tax calculation is simple (certain states haveno sales tax), or its a fixed percentage tax rate across a state. However, there aremany states where sales tax calculation is more complex.

For example, a business in Arapahoe County, Colorado selling to a customer in the

same county would need to know the following rates prior to charging sales tax:

Colorado (State Tax) 2.9%

Arapahoe (County Tax) .25%

Aurora (City Tax) 3.75%

Scientific & Cultural Facility (Special Tax) - .10%

RTD Greater Denver (Special Tax) 1%


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NOTE: In 2012, the number of changes in these rates, rules and boundariesequaled or topped seven thousand across 46 states. Monitoring these changesusing hard code, pushing rate tables or designing special processes to handlethese changes, is critical. Businesses unable to ensure accurate application ofrates and taxability face increased audit risk. It is extremely important for ecom-merce businesses to ensure accuracy in rates and taxability.

Sales tax needs to be collected on numerous products and services across thecountry. The list of products and services may vary from state to state. For in-stance, in Florida, school items are not taxable during school holidays. In NewYork, clothing and apparel are only taxable when the cost meets certain dollar

thresholds ($110). In California, digital software downloads are not taxable, butthe same software bought in a box with a CD is taxable. Clothing and apparel,medical devices, digital media, software, and services are all examples of indus-tries in which product taxability rules apply. These are just a few examples of thekinds of product taxability challenges that Internet merchants face.

It is very important to make sure you know the relevant state product taxabilityrules. Once you know these rules, they should be kept up to date via hardcod-ing, rate tables that match product taxability, thresholds, holidays and sourcingrequirements.

Streamlined Sales & Use Tax Agreement

A number of states have worked together on an agreement called the Stream-lined Sales and Use Tax Agreement. The purpose of the Agreement is to simplifyand modernize sales and use tax administration in order to substantially reducethe burden of tax compliance. For companies with aggressive expansion plans,or affiliate relationships in a number of states, registering as an SST volunteer cansave you a lot of time, effort and money.

Signing up to SST requires only one form to register across all SST states. Thereis no cost for registration, and, if you qualify, filing is a free service across the SSTstates. SST volunteers have limited audit exposure (no negative audits possible).

Arkansas

IndianaIowa

Kansas

Kentucky

Michigan

Minnesota

NebraskaNevada

New Jersey

North Carolina

North Dakota

Oklahoma

OhioRhode Island

South Dakota

Vermont

Washington

West Virginia

WisconsonWyoming


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SST Member States Include:

The Marketplace Fairness Act of 2013

On May 6, 2013 the U.S. Senate passed a bill known as the Marketplace FairnessAct of 2013 (MFA). This act grants federal permission for states to require collec-tion of sales tax by remote sellers (such as Internet retailers, mail-order catalogs,or phone sales) if states adopt specific measures. The bill is currently before theHouse of Representatives, and a vote could come at any time. The White Househas already indicated strong support and a willingness to sign it. If passed by theHouse and signed by the President, the bill will become law. For more informationon this legislative activity, visit www.salestaxchanges.com.

The current version of the Marketplace Fairness Act sets a revenue threshold forremote sellers of $1M of remote sales revenue in the prior calendar year. Even ifyour business falls below $1M in revenue, it still is bound by standing state nexuslaws, and their enforcement.

Companies concerned with how their expansion might be impacted by federallegislation might look at SST as a means of building sales tax compliance intotheir business processes. Setting up on a sales tax infrastructure will make thetransition to a post-MFA world easier.

Even if federal legislation passes, sales tax rules will still vary widely from state tostate, and from jurisdiction to jurisdiction. Some states may continue to have nosales tax, others will maintain complex jurisdictional and product taxability rules,

and everything in between. As weve seen, taxes can apply to specific products,types of products, or thresholds for those products. Products or customers can beexempt from sales tax. Rates and locations change constantly, based on seasons,events, or holidays. Keeping current with the changes and getting filing done ontime is time consuming and requires you to devote resources that could otherwisebe generating more revenue for your business. And, if youre audited, the cost toyou in time, resources and money can be quite substantial.

Audits Happen, Protect Yourself

Audits can happen at any time, and over the last few years, state enforcementactivities have risen dramatically. California and Washington have doubled thenumber of auditors in just three years.

When you are audited, the auditor will want to see documentation of your sales,the sales tax you collected, and sales where you didnt collect sales tax. Mostecommerce businesses do not have a sales tax professional on staff, and com-panies tell us they can spend weeks finding and preparing the information beingasked for, and even more time in the audit review.
http://www.salestaxchanges.com./http://www.salestaxchanges.com./http://www.salestaxchanges.com./


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The key areas auditors will focus on include tax rates on collections (jurisdictionand product taxability) as well as exemption certificates for ecommerce business-es that sell to end retailers.

Auditors often find errors in tax rates because rate calculations were basedon ZIP codes. For the most part we find that these are responsible for themajority of errors and fines in sales tax audits of ecommerce businesses.Why? ZIP codes were designed for shipping, and not sales tax. You can learnmore about complexity of state and jurisdictional boundaries atwww.avataxrates.com.

Auditors also expect to see documentation including a copy of a salestax exemption certificate for each sale exempted from sales tax. Manybusinesses being audited spend a great deal of time and effort to find or trackdown the exemption certificates they need to include.

During a review, the auditor may come back to you many times for more informa-tion or clarification, and the process can take weeks or months. After the review,any discrepancies and errors can be met with additional tax liabilities and fines,and it is more than likely that, once youve been audited, a state is likely to audityour business again in the following year or two.

Automation or Not?

Not automated? Many small business owners either do their own sales tax remit-

tance, or pay for bookkeeping or accounting help. There is a cost for doing it eitherway; in time, resources, accuracy and dollars. You may need to subscribe to taxcontent you can use on an invoice or line item level. You are responsible to knowthe changes that occur where you have to collect sales tax.Automate It! Technology services are available in the market to help businessesautomate sales tax calculation. These range from on-premise servers to simplesales tax calculation using ZIP code downloads, to services that can integrate yoursystems and automate the whole process.

ZIP code-based solutionsare based on US Postal ZIP codes, and whilethey may be adequate for simple tax states, they will leave you with

compliance issues in states where sales tax is more complex. These solutionsmay require setting up your own server, administering, managing andupdating subscription files on a monthly basis. They may also be providedas an add-on to payment or logistics systems. ZIP code-based solutionsgenerally provide limited or no reporting or product taxability capabilities,and the providers of these solutions may not have adequate resources tosupport your systems or tax information. And when you have an issue, you
http://www.avataxrates.com/http://www.avataxrates.com/http://www.avataxrates.com/


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may be charged per service call.

Cloud-based solutionseliminate the need for an on-premise sales taxserver or infrastructure. With a cloud-based solution, you have no needto manage or update hardware, software or tax data. These solutionstypically provide sub-second speed within the shopping cart (helping toavoid abandoned carts), and should provide out-of-box reporting with dataaccessibility and export capabilities. They should integrate with a businessssystems that generate quotes or invoices. Some services may use ZIP codetables or may not own their own tax data. This can make a difference inaccuracy and support.

Periods of high growth, or upgrades or changes to your ecommerce site, provide

good opportunities to explore how automating sales tax can help your business.Whether you are a small business selling in one state, a business expecting tobe over the threshold for the MFA, or a company with nexus in multiple states,sales tax can be an opportunity for you. Automating sales tax transforms salestax from a burden into a simple part of your business process, and a competitivedifferentiator. Automation results in far fewer resources devoted to sales tax andfar less time devoted to sales tax compliance, and can substantially reduce yourexposure in audits. Some Avalara customers even use sales tax as a promotionaltool with in-shopping cart tax free days or discounted tax days.


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Call 877.780.4848Click www.avalara.com

Get Started.Learn more about pricing, online demos, or

chat about Avalaras capabilities.


Want more information on the best way to automate salestax for ecommerce?

To learn more, view online demonstrations, or chat about Avalara AvaTaxcapabilities, visit: Get Started Today!or call 206-826-1132

Avalara AvaTax is an easy-to-use sales tax calculation and filing solutionthat integrates with hundreds of shopping cart platforms, fully automatingtax compliance processes and reducing the risk of business audits. The web-based service delivers instantaneous sales tax calculations using a central-ly-managed, highly accurate calculation engine that leverages up-to-datesales tax rates, rules and jurisdiction boundaries. Coupled with automatedfiling, remittance and exemption certificate management, AvaTax providesunprecedented sales tax functionality to boost business productivity whileminimizing audit risk.
http://www.avalara.com/e-commerce/pinnacle-carthttp://www.avalara.com/e-commerce/pinnacle-carthttp://www.avalara.com/e-commerce/pinnacle-cart

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Sales Tax and the Internet Merchant