When should I charge sales tax online?
It’s the one thing skipped over most often in ecommerce planning. People justify it. They keep it at the bottom of the list. Sales tax. There are so many questions, most people’s only defense is to ignore the whole subject.
- What if the customer is in our state, but a different county?
- What if the billing address is the same, but the shipping address is different?
- Do some states/counties have different laws?
- What if I have an office/sales rep in another state?
- What if the tax rates change?
Overwhelming at best. But the government surely has a clear answer right? Like usual, they’re working on it, but the answer is pretty muddy. Since 2002 more than twenty states have participated in an initiative called the “Streamlined Sales Tax Project.”(SST) (NYT) While it’s an effort to simplify things, it has been hindered by a lack of adoption, and lack of exposure.
The initiative included an effort to provide software solutions that would be subsidized by participating states. The states themselves do not produce, or distribute the software, but rather rely on private sector companies for development. As of today, only 3 companies have passed the certification process to provide the software. While the program promises free, and subsidized software, in actuality the services typically cost $1000+ per year.
Avalara, apparently the largest provider of SST software goes to extreme lengths to provide legitimate taxation data. From their own literature:
“…maintained by its staff of CPAs and other tax professionals, who track sales tax rates, rules and changes from over 12,500 taxing regions.”
Let’s just dwell on that for one second… “12,500 taxing regions.” If you use their service you’re not guaranteed compliance, and your out the yearly fee. If you don’t use their service you could be responsible for keeping up with thousands of taxation policies that can change many times a year.
In the face of such cost prohibitive and complex options, most companies fall back on older more concrete legislation:
“The 1992 U.S. Supreme Court ruling in Quill v. North Dakota held that only businesses with a physical presence in a state are required to collect sales taxes on purchases shipped there. Typically, companies have been deemed to have physical presence if they maintain a store, office or distribution center in the state, or if any employees are based there, such as a sales representative.” (in)
Even this holds no clear answers though. Some states try to define your physical presence (nexus) as not only where your physical assets are, -but your digital ones as well. Do you know where your hosting server is? It’s totally arbitrary, and could be different on different days. Many hosting companies are beginning to spread copies of websites across multiple data-centers to ensure redundancy. Your site could be hosted in California one day, and New York the next.
The future will surely bring about changes to these laws. Companies like EBay are actively lobbying congress for change, and simplification.
“EBay’s position is that any legislation requiring sellers to collect state sales tax should exempt businesses that sell “in the range of $5 million” or less annually, said Hani Durzy, an eBay spokesman. For a small business to have to track all the taxing jurisdictions is enough a burden as to possibly risk putting them out of business,” (nyt)
New York is seeking to force all ecommerce transactions to be taxable, this way everyone starts understanding ecommerce, whether the merchant has nexus in NY or not. If this law passes all ecommerce software functioning today would need rewritten, or adjusted. The move by New York has widely divided opinions:
“Joe Henchman (tax counsel at the Tax Foundation, a Washington, D.C.-based nonpartisan research and educational organization), who opposes the New York provision, doesn’t see Streamlined as a solution, either. He criticized the project for linking jurisdictions to nine-digit ZIP codes, which he said reinforces artificial and obsolete economic boundaries and fails to whittle down the number of tax codes to a level that merchants can be expected to navigate.”
One thing is for sure. The government expects someone to pay for the tax on the transaction. If it’s not your responsibility, it’s that of your customer. All states have elected to enact something called “use tax.” Basically use tax assumes that if you are using the product within a tax region, and tax has not been paid somewhere else, -then the consumer must pay. Amazingly, this applies not only when tax has not been charged, but when the tax charged is less than that of the customers’ taxation region. The consumer is obligated by law to make up the difference. As a site owner, don’t get any wise ideas to offer to cover the sales tax for your customers, -it’s illegal. Baffling.
So where does it leave us today?
- In actuality, the services provided by companies like Avalara though costly, are fairly easy to implement, and leave you reasonably protected against possible sales tax issues. If you have many locations, or sales reps, -they’re your best bet for sure.
- Most small ecommerce retailers can continue charging sales tax only within states in which they have nexus (albeit tough to define). There seems to be no concrete evidence against this approach.
- We will all have to actively watch both the New York sales tax initiative, and the Streamlined Sales Tax Project to see how the tide eventually turns.
- It’s best to consult a tax professional for a definitive answer on your specific situation.