Can someone please explain the Supreme Court Ruling regarding taxing online sales?
As a sales tax accountant, I thought I would post about the Supreme Court ruling, and let you know what it means — at least from my point of view.
At issue was whether a state could impose a sales tax on entities that sold online, and delivered those products to customers within that state. South Dakota passed a law that required online retailers with $100,000 in sales or 200 transactions to customers within that state to collect and remit sales tax. Known as “economic nexus” laws, there are currently 19 states that have implemented these, but some have been delayed or were pending the outcome of this case. With the decision, these laws are constitutional, and states can now enact and enforce these.
This decision does not automatically mean that online sellers have to collect and remit in all states that have a sales tax. Currently, if you are an FBA Seller, your inventory obligates you to collect tax in the states in which your inventory resides — having inventory in that state is the threshold that meets the obligation to collect and remit. Under the SCOTUS ruling, the “economic nexus” laws also have a threshold, but they do vary from state to state, but they usually have a minimum transaction or a dollar amount. In South Dakota if you have less than 200 transactions and less than $100,000 in sales in the preceding calendar year, there is no requirement for you because you haven’t met the threshold. It’s important to note, that some of the states that have these laws, also have FBA warehouses. Until these other states pass laws for online sellers, you won’t need to register in every state.
But, this leads to questions about when you should register. In accounting, we use the term “materiality”. Generally, if the cost of compliance is more than the amount of tax you collect, you probably shouldn’t register, but should be prepared for the possibility that the state discovers you and requires you to register, and possibly pay back taxes. If that happens, you’re only out the cost to become compliant. If the cost to become compliant in that state is an initial $75, plus $240 a year to pay for filing fees, and you’re only collecting $10 in tax a year, wait until the state comes and asks for that $10 plus penalty, plus interest. Which at 25% penalty, and 6% interest, equals about $15. But in all frankness, the state of South Dakota doesn’t have the time or resources to track you down for the $15 a year you owe them.
Many FBA sellers are left to wonder why Amazon doesn’t collect on your behalf, or why the states don’t see the relationship as “consignment”. Amazon has always been a tax evader, and purposefully set-up to evade paying tax. Yes, they could, if they wanted, collect on the sellers behalf. They just don’t want to do that. A few states have passed laws which require marketplace sellers to collect on behalf of its sellers, and currently Amazon does that in WA, PA, and now OK. But, don’t expect that to happen in every state, and probably not the larger states — CA, TX, FL, and IL. Because of how the sales tax laws are written in these states, it could take years, before laws are rewritten to handle remote sellers and marketplaces. If it happens, it will happen gradually over several years.
Many are asking whether Congress could do anything.
Sure, they could do anything they want, but since Quill in 1992, it’s always had the power to fix it. They never did. I think it is unlikely that they will intervene now that the decision has passed. That’s too bad because they could have made the standard across the board. Now, instead, each state will be able to set their own thresholds on when remote sellers should register.
Again, before you gnash and gnarl your teeth over this, sit down and make a determination as to when (and if) you should register. Some causal sellers may only need to register in a few of the larger states because sales in the other states aren’t material. If your sales are significant, say over $250,000 a year, then you’ll need to take serious your obligations to collect and remit in more (if not all) states.
If you’re not big enough to make that much gross sales per state then there is nothing to worry about until the states in question make their move. Currently most states are using the $100,000/200 transactions rule (If you have 200 transactions or $100,000 in sales).
The only downside to this is if you are a low cost, high transaction seller. For example, selling a $1.99 item in South Dakota with 300 transactions would obligate you to collect the $19.90 in sales tax collected. This does seem to be drawback in the law, in my opinion.
If you have 200 transactions at $1.99, you would still be required. But, it’s likely that your overall sales have to be high in order to do 200 transactions. For example, I have a client whose sales are around $5 million a year. Currently in South Dakota they have 85 transactions for a total of $6,000 in sales. By the end of the year, we expect them to have over 200 and around $18,000 in sales for a tax obligation of about $900.
In order to have the number of transactions in that state, your overall sales have to be high.
This sales tax will be paid by the buyer and you just hold it until it’s time to pay the state. So in theory with the exception of software it’s more of a collection issue.
However, if you should be registered, but don’t collect, the onus is on you to pay out of pocket if you are discovered by the state. So, if the cost for you to be compliant is more than what you could expect to pay out of pocket, wait to get registered.
The laws vary from state to state, but most refer to “current or preceding” calendar year, so at minimum, you should review last years sales and transactions. So, you do need to project your sales and determine if you will go over that threshold.
The states where Amazon now collects this tax made this happen by changing their laws. It’s possible that other states choose that direction as well, if only because it is so much easier to deal with one company than with literally millions of small sellers. But you have to remember that in these states there needs to be a legislator who sponsors a bill, and generally, bills are sponsored because there is somebody lobbying for it. It’s not as simple as writing a law because these have such wide reaching consequences for current law.
We’re still looking at years before that could be implemented. Back in the late ’90s there was an effort to streamline sales tax in the various states — about half the states complied. Some complied on certain things without adopting the entire measure. And everybody was onboard for changing the system.
Chris Stout is the owner of SalesTaxSolutions, offering a wide range of affordable sales tax solutions.