The rules for collecting and remitting sales tax can be complicated and overwhelming for many businesses across the United States.
To help make things a little clearer, sales tax expert Kevin Buckner addressed businesses in a recent webinar hosted by Avalara, Sales Tax for Dummies. He explained some of the most significant sales tax terms and issues businesses must understand in order to properly comply with their sales tax obligations.
In this article, we take a look at some of the important issues surrounding ecommerce sales tax and what merchants need to know to be compliant and successful.
Sales Tax Basics
Sales tax (a.k.a. “retail sales tax”) is a transaction tax which states and thousands of local jurisdictions are permitted to impose on the sale of a product or service from a seller to a consumer.
The businesses that make the sales are responsible for collecting the tax and then remitting it to the proper state or other local jurisdiction.
Generally speaking, states may collect sales taxes from sellers that have established a connection, or nexus, with that state. The standard for this nexus used to be a seller’s physical presence within a state. Now, however, in addition to physical presence nexus, states are allowed to pass legislation that obligates sellers to collect and remit taxes if they have established an economic connection as well. A relatively new standard, economic nexus has added a fair bit of complexity to the compliance process.
What triggers economic nexus?
Economic nexus laws can vary from state to state. In an effort to protect smaller businesses from burdensome requirements, most states have identified a minimum threshold of sales and/or transactions that a business must meet before it establishes this economic nexus. For example, South Dakota’s threshold is $100,000 in sales or 200 transactions. In some states, a business must reach both transaction and revenue thresholds before triggering nexus. Other states only require a sales revenue threshold. Threshold amounts can also vary considerably depending on the state.
In addition, state laws sometimes differ when it comes to the period of time for meeting the threshold for nexus. Some laws declare thresholds met in the previous or current calendar year create nexus, while other states’ laws use a rolling 12-month period.
Despite the burden, businesses are responsible for knowing and complying with each state’s sales tax laws.
Taxable Products and Services
Once again, laws regarding taxable products and services vary. What’s taxable in one state, or sometimes even one local jurisdiction, might not be taxable in another. Tangible personal property is subject to sales tax, and often (depending on the state), so are services. Groceries, as well as items purchased for resale, are often exempt from sales tax.
Calculating sales tax
Brick-and-mortar sellers have it relatively easier than online merchants. Once they establish whether their item is taxable, they simply need to charge the appropriate state and local sales tax according to their physical location.
Those selling remotely, however, must do a bit more research.
- Are the items they’re selling taxable in the states or jurisdictions where their customers are located?
- Do they have either physical or economic nexus in that state or jurisdiction?
If the answer to both is yes, the business will need to charge the total state and local tax according to the rates in those jurisdictions.
Once tax is collected, sellers must of course also remit the tax revenue to the requisite states. Complicating matters further, sales tax laws tend to change frequently, leaving many businesses unwittingly non-compliant.
Are you exempt from sales tax?
Even when a business hasn’t reached a state’s threshold, or the items they sell aren’t taxable in a particular state, tax-exempt sales come with their own set of complications.
During an audit, a business will be required to show an appropriate exemption certificate for each sale claimed to be exempt from tax collection. Missing, expired, or invalid exemption certificates cause a majority of audit penalties, but other common exemption certificate errors include:
- Missing signatures or issue dates
- Incorrect claim type
- The exemption claim document (letter, email) was never recognized by state taxing authorities
- Certificate includes a name or address other than direct buyer and seller
- Certificate shows incorrect state ID
For companies selling multiple products and services into multiple states, validating, managing, and storing exemption certificates can quickly become onerous. Even unintentional non-compliance can mean paying the uncollected tax plus applicable interest or penalties.
Managing Compliance
We’ve only scratched the surface here in explaining some of the more important aspects of managing sales tax compliance. With over 12,000 distinct taxing jurisdictions in the US, rules and tax rates can vary significantly, requiring a considerable vigilance to avoid penalties and fees. But that doesn’t mean you need to be overwhelmed by complex requirements. A cloud-based tax compliance automation solution can help you calculate up-to-date sales tax rates and remittance amounts, allowing you to breathe easy knowing you’re always in compliance.
Want to learn more? Watch on-demand webinar, Sales Tax for Dummies (hosted by Avalara).
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