Sales tax was never fun. But it could be getting worse. And no, this is not a click-bait headline scam, “5 Reasons You’re Failing at Sales Tax” or some nonsense like that! It’s for real.
This is all somewhat recent news to me. So let me explain what I’ve learned so far, and some of the issues at stake. Right now, a lot of this is very much up in the air. The Supreme Court will be looking at some of these issues later this year. Until then, I just want to keep you informed so that you can dive in and learn what you need to know for your business. And please share with other friends you know in the online space.
2019 UPDATE TO THIS POST – HERE
This post may contain affiliate links, for questions see my disclosures.
As we all know, the United States was founded on the idea that each State was independent, and that the Federal government would have just a little oversight. Each State could then tax as they saw fit.
When it came to sales tax, back in the day you bought goods and services in your State and paid your State’s sales tax. Simple.
Now that we are in the internet age, this is not so simple anymore. Many, many, many people are buying goods online, and buying from sellers in a state different from their own.
For a long time, the rule that you had to have a physical presence in a State in order to be required to collect and remit sales tax stood. And you only had to collect from customers in the State where you had a physical presence. A reasonable burden for us small business owners. Most of the time that meant we collected and remitted to one State only, the State where we lived.
Enter the “Wild West of Sales Tax” (a phrase coined by Jennifer Dunn over at TaxJar and I just love it!). Now States are realizing that they are missing out from all these internet retail giants who don’t have a physical presence in their state, yet sell to their residents. These States want a piece of the pie.
So more and more states are chucking the physical presence rules in favor of “economic nexus” rules. So if you sell more than X amount to residents of that State, you must collect and remit sales tax from them, even if you do not have a physical presence in that State.
Thankfully, many of these economic nexus rules set high thresholds. Many of these thresholds start at $100,000 in sales, some are as high as $500,000. So it only triggers huge retailers to begin collecting and remitting to the State.
However, several states have begun setting a lower threshold, I’m talking $10,000 low! Whoa, Nellie, that is low! And some States are setting a transaction number threshold, 200 transactions into that State seems to be a popular number. That is low too!
How widespread is this? The Tax Foundation says that 31 States are now taxing internet sellers with no physical presence!
What does this mean for you?
If you are an Amazon Seller or Etsy Seller, they are beginning to collect and remit sales tax for you to all these different states. This is a change. I know for sure that Etsy beginning on 1/1/18 began collecting and remitting sales Tax to the State of Washington on every Washington sale, regardless if the seller lives in Washington or not. I just received a notification that they will begin doing the same for Pennsylvania beginning 4/1/18. I tried to look up and see if this was the case for other States yet, but their help on this topic is sparse. Let me know if you have received notifications about Etsy doing this for other States.
The biggest problem area will be if you sell products on your own website. In that case, depending on your volume, you may be required to register and remit sales tax to many states.
This could also be an issue for those selling online courses. I did not look at every course creation website, but I did look at Teachable, a very popular choice. Teachable does not collect or remit sales tax for you.
So then I looked at Stripe, a popular payment collection service. Same deal. No help with Sales Tax.
That means, for State’s with a $10,000 threshold or 200 transactions threshold, if you sell courses to that State in excess of those thresholds, you will be required to register, collect, and remit sales tax to those States. Yikes!
This TaxJar article explains the thresholds for each State.
If you are an online seller, especially if you sell on your own website, or sell courses, I highly suggest you look at these very helpful articles about the whole situation. Tax Jar and Tax Foundation are two websites I frequently use for tax help. Also, look at your service providers to see if they will be offering assistance in this area as States systematically change their sales tax laws.
The way I see it, here are the issues at stake:
- The USA was founded on the idea that States had independence, with a low level of Federal influence. So each State can set their own rules on Sales Tax. State independence is important.
- Should a State be allowed to place a burden to collect Sales Tax from sellers who do not live in that State? Or have a physical presence in that State? This does not seem right to me.
- Unlimited Tax Authority by each individual State could have a burden on interstate commerce. And we live in an age of tons of interstate commerce! Plus there are over 8,000 sales tax districts! Should each district have authority over my commerce?
- States, where companies do not have a physical presence, are missing out on tons of Sales Tax revenue under the old rules of physical presence. As an example, no one has a physical presence in South Dakota, so they miss out big time under the physical presence rules.
- The burden to small business owners could be enormous if State’s adopt low thresholds! So little old me is supposed to know and understand the sales tax rules, rates, and file returns in every State? That would be ridiculous.
- At the same time, it is not a huge burden for Amazon to know each State’s sales tax law and remit to each State. It’s a burden for sure, but not a business ending burden.
- Then there are the brick and mortar stores. Economic nexus rules level the playing field for them. Why would a customer pay an extra 8% in sales tax at their local store when they can order the same product online and not pay any sales tax? The current physical presence rules put brick and mortar stores at a huge disadvantage.
- These new laws seem very one-sided, more revenue, please. They are very focused on what is best for that one State, but not focused at all on what is good for business as a whole, or good for business across the entire Country.
In general, I feel like a complete overhaul of how Sales Tax should work might be required. The issues of Sales Tax are many and complicated. All parties concerned should be carefully considered. New Sales Tax laws should not be passed willy nilly without thought to all sides of the issue.
Until this Wild West of Sales Tax settles down, how will you make sure you are in compliance with each and every State. If you sell across multiple platforms, each that handles sales tax differently, you could be up a tree in no time. (For some reason I’m using a lot of metaphors in this post!). TaxJar might be a solution worth looking into if you find yourself overwhelmed by sales tax. They integrate with a wide variety of online platforms on shopping carts and then calculate your sales tax owed. Did your stress just vanish? Mine did! See if their services are right for you over at TaxJar.
I am not an expert on this, just learning as I go. If I have gotten some part of this wrong, let me know.
Do please check out the articles I mentioned for more information. They are the experts.
Unfortunately, I think it is going to be a rough ride until all the dust settles over this issue.
The dust has settled, see the