Launching an e-commerce site is no small task, between learning about your market, researching your competition, setting up merchant accounts, building out your site and finding a shopping cart vendor. Added to that long list is figuring out a system for dealing with sales tax.
“With over 10,000 taxing jurisdictions in the U.S., tens of thousands of zip code changes monthly and ever-changing rules based on the types of products a retailer may sell, keeping up with these changes would become am almost full-time job for retailers to the exclusion of all else,” says Pete Petracco, CEO and founder of AccurateTax.
And, since some states have even more granularity for their rates, even getting a tax rate to just a five-digit zip code isn’t always going to be right, he adds.
AccurateTax TaxTools was built to help business owners cut down the amount of time they need to spend managing sales tax information. Here, Pete offers more insight on the issues and trends surrounding e-commerce sites and sales tax.
Tell us about AccurateTax.com… what services do you offer? Who should be using them?
Our TaxTools service allows retailers to calculate and collect sales tax for each transaction on their online store as it occurs in real-time. Their existing website sends information about each order to our servers, and we respond with the correct sales tax rate and amount, which get added into the order. We handle the difficult processes of figuring out the sales tax rate for a given address and for the specific products being ordered. This frees the retailer from needing to maintain a multitude of tax rates and the geographical information that determines what tax boundaries an address falls in. We also provide reports of sales tax collected, so retailers can view how much tax dollars they have collected for each state and taxing authority over any given date range, as well as remittance services.
What are the biggest problems/frustrations your clients are hoping you can solve?
With so much discussion of sales tax in the news these days, most customers are focused on ensuring that they are using accurate rate information, that their overall product taxability classifications are correct and that they are reporting and remitting the correct tax amounts on time. Sales tax is typically the last thing a retailer thinks about when setting up an online store, and yet it can potentially cost them the most if not done correctly.
What do you think is the probability of an internet tax or a national sales tax?
At present, I think there are currently too many variables to say for sure what the probability might be. The Senate passed a measure last year, the Marketplace Fairness Act, but it failed to gain traction in the House. It was widely speculated that some movement would occur during the lame duck session of the last Congress, but that did not occur; and as such, the law was taken back to the proverbial drawing board. Certainly, I think state governments are looking for the legal clout to pursue the sales tax that is currently owed by consumers but rarely if ever reported; and many of those state legislatures view a national law as their only true avenue to make that happen. But while it may have grassroots support from a variety of organizations, I think it will still be a painful, uphill climb to adopt a national law.
The new Congress is exploring its options, whether that translates to another run at MFA, or a new option such as Congressman Goodlatte’s Online Sales Simplification Act (OSSA) – or something we haven’t seen yet. It’s too soon to tell which (or any) approach will lead to a national sales tax law.
The bottom line is that some form of national sales tax law that will standardize a process for the collection of sales tax revenues for all states will be passed at some point. Whether that’s going to be 6 months or 6 years is difficult to say. What we have seen in the past few years is that states aren’t waiting for the federal government, which makes it more difficult for companies who want to comply with sales tax laws.
Can you elaborate on that point?
Without overall guidance and oversight on a federal level, states are left to their own devices as to determining nexus, which means a company’s Internet business model tends to dictate ultimately what their nexus liability is. For example, when a mom-and-pop shop used to get setup to do business online, they’d typically have a single nexus point in one state and really nothing else.
For those e-commerce stores, the idea of a national sales tax law seemed a daunting task for implementation and compliance purposes; but today, more and more online stores have alternative sales channels; products being shipping directly from suppliers, creating a drop-ship relationship with the e-commerce storefront; affiliate relationships causing transactional nexus to be created, and much more. So the mom-and-pop shop, while they’ve been able to increase their reach and ability to sell nationally, have also creating nexus liabilities for themselves, thereby increasing their own sales tax footprint.
How can a company know where they need to collect tax then?
Well, speaking with a professional, a CPA or other tax advisor versed in sales tax liability is key, especially if you are using some of these more non-traditional models. We provide this service ourselves, but it’s not a requirement that you use AccurateTax or anyone else. Some clients may choose to research their nexus liability themselves; while others seek out professional advice.
How would this help or hamper e-commerce businesses?
First, I think it’s important to clarify this would not be a new tax, but rather would be a federal mandate to allow states to collect the sales tax that is already currently owed and is simply not being collected by retailers or reported by consumers. It would certainly help state economies; however, it may also de-incentivize shoppers from shopping online, at least in the short-term. Many brick-mortar sellers have concerns that their stores are becoming merely a browsing location whereby shoppers later buy online to avoid sales tax charges.
So, ultimately, I think it would have a positive local economic effect for those local area retailers.
As a shopper, today when you shop online, you still owe any sales tax for your local area if that is where you first take possession of the products. That’s true, whether one buys from an online or local store; however, most shoppers simply do not report that use tax on their state tax forms or they mistakenly believe the sales tax is not owed since the retailer did not collect it. If avoiding sales tax is no longer a valid reason for buying online, then in all likelihood total price and availability become the primary drivers to e-commerce’s continued success.
Will businesses like yours ever get into the business of collecting sales tax and depositing on behalf of e-commerce sites?
We do this already for SSTP states, so the system to support this type of process is already in place. A national law would likely adopt a similar set of rules and/or processes applicable for all states, and even if there were states that wanted a different process, AccurateTax would address that with the states as part of any certification process to ensure our clients could continue to use our solution.
What should someone starting up their own e-commerce site concern themselves with when it comes to sales/use taxes?
Know where you have nexus, in other words, what state(s) you have a physical presence in. The tricky part is that different states define “physical presence” differently, so many times, our customers come to us and ask us to assist them in determining what their nexus points are. Once you’ve addressed the nexus issue, the next consideration is product taxability.
Apparel items, food items, digital goods, medical and telecommunication products all may be taxed differently on a state-by-state basis. So, knowing what you sell, and how the states classify those products, is very important as well. For perhaps as many as 90 percent of all customers, you will simply have taxable products for the state(s) you have nexus in, but when you do sell special items, managing the overall taxability of your products can become an incredibly daunting task.
What are the risks a business owner runs into if they aren’t taxing customers properly?
The dreaded “A” word, for one. Having a state conduct an audit and finding out that sales tax was owed and not collected is, I believe, every retailer’s worst nightmare. Clearly, it becomes difficult for a seller to go back to a customer post-sale, months later, and say, “Sorry I should have collected sales tax for your order and didn’t,” so that burden becomes squarely placed on the retailer after the fact. Subsequently any back taxes, penalties and fees become their responsibility.
I’d like to see states take more of a “one time foul, get out of jail free” tact, where a seller who is found to be in error of having not collected properly would receive a warning of what they should have done and are given a grace period to bring their processes into correct alignment. In the end, I think states would be better served by educating first and penalizing second.
What are the most common items e-commerce sites need to account for when it comes to taxes? Are there any common items where no tax is needed? What about services?
Put simply, almost every product is taxable. But there are certain cases where different classes of products are taxed differently, whether that means taxed at a different rate, or that some line item threshold must be met before taxation begins. Knowing what you are selling, or rather, how the states classify your products, can be the difference in taxing correctly or running into a big tax bill at the end of the year.
When we speak with a new customer there are certain product types, such as apparel items or food items, that raise potential “red flags” for us because we know there are a variety of states that have custom tax rules associated with these types of items. But what you sell is only one component because how you sell it and/or how it’s paid for are also considerations. For example, medical equipment purchased with Medicare or with a prescription might not be taxable, but without it would be. Or, providing certain software programming services under different types of maintenance contracts might be taxable in one state and not taxable in another.
What seem to be the biggest headlines or trends in the world of e-commerce today?
As far as sales tax goes, internet taxation is the biggest item right now, I think because we’re in a post-election/lame-duck time period and there are a few potential laws out there that have people concerned. Whether it ultimately comes about or not still remains to be seen, but at a minimum that’s the biggest red flag for e-commerce retailers today.
Beyond sales tax, we’re also seeing a trend of retailers expanding their selling channels. We’ve spoken with pure e-commerce businesses who are considering opening their own physical store. Additionally, merchants are growing their businesses by selling on third-party markets. eBay and Amazon are the classic examples, but other businesses like Sears and Walmart also have marketplaces, and 11 Main from Alibaba are newer alternatives. Each of these represents additional revenue sources for retailers, but adds to the complexity of managing their businesses, including but not limited to sales tax.
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