You may have read or heard about the latest sales tax ruling which allows states to change laws forcing online businesses to collect and remit sales tax. Now you’re wondering how this will affect you. Let’s take a look at how the latest ruling impacts sales tax for your small business.
Sales tax for your small business
Old Sales Tax Law
First, let’s understand what’s going on here.
In 1992, the courts ruled in Quill Corporation vs. North Dakota that the Constitution bars states from requiring businesses to collect sales tax unless they have a physical presence in the state. This decision helped allow for the growth of online retail by allowing companies who sell nationwide to not have to navigate the complex and confusing jumble of state and local tax codes.
However, as online retailing has grown, the dynamics have changed. In 1992, mail-order sales totaled $180 million; last year, online retailers sales exceeded half a trillion dollars. Basically, many online sellers are no longer small start-ups competing with more established businesses, think Amazon, Overstock, Wayfair, etc.
State legislators feel state budgets are increasingly feeling the loss from these online sales; some states claim to have lost up to $33 billion in annual tax revenue. Many states have made rulings requiring consumers to report sales and/or use tax from online purchases on their income tax forms. However, not many taxpayers actually comply with this.
Some states enacted new rules to try to enforce taxpayers to pay their use tax on online purchases from out of state. In 2010 Colorado passed a law which established notice and reporting requirements for retailers that make sales to Colorado taxpayers but do not collect Colorado state sales tax. In 2017 this law started being enforced and retailers are required to inform consumers of their purchases as well as provide this information to the Colorado Department of Revenue. I, personally, have seen a notice provided by an online retailer to a Colorado taxpayer who made a larger purchase online, so it is happening.
Knowing, understanding and reporting to every state and local jurisdiction sounds daunting, right? As a small business owner, you’re not alone!
How these changes impact you
Now that states are allowed to require any online business to collect sales tax, you may have to start understanding, collecting and remitting sales tax for all your online sales. In an earlier post, I talked more about sales tax for a small business owner which walks you through licensing, etc.
I totally agree sales tax is challenging, especially for a small business with lower revenue.
I caution you NOT to fret. Not every state has this on the books yet. It’s worth keeping an eye on though. You do need to understand your obligation should states start enacting new laws regarding sales tax.
There is one state that tried to implement new laws in anticipation of this new rule passing. That state is South Dakota. Let’s take a look at it.
In 2016, South Dakota enacted legislation that was clearly unconstitutional by the old Quill case standards. This law required remote sellers without a physical presence in the state to collect sales tax if certain gross revenue or transaction thresholds are met – more than $100,000 of goods sold or 200 transactions.
Will the South Dakota requirement for any online retailer be upheld? I think it will, so it’s something to be aware of. However, does your business surpass the minimums in the state of South Dakota? Does it ever sell to a customer in South Dakota? These are both things to consider. You’ll only need to collect and remit sales tax for your customer’s locations.
Many other states will have to change their current laws to take advantage of this decision. Don’t worry just yet. Any new laws could face their own legal challenges in those states.
Also, this ruling has left open the possibility to allow states to decide if small businesses are exempt from any new online sales tax rules. This means that each state decides whether or not they offer a revenue exemption for sales tax collection in that state. The new court ruling also leaves it up to the individual state whether or not it will seek sales taxes retroactively, which both South Dakota’s and Colorado’s law do not.
Software that helps collect sales tax for your small business
Lastly, there are software services that will help you determine, collect and remit tax in whichever municipalities you sell. But, you guessed it. These software services come with a price and as a small business, these can dig into the bottom line. If you’re interested in learning more about these services here are some examples, TaxJar, TaxCloud, Taxify, Avalara and more. Costs for these services range from $9/month to $47/month and higher and depend on your monthly transactions.
The one good thing about these tax services is that many will integrate directly with your sales platform or accounting software including Amazon, ebay, Shopify, Stripe, WooCommerce, Xero, PayPal, Etsy, etc.
However, if your small business uses a third party platform to sell goods, such as Amazon, Etsy or Ebay, it may be collecting sales tax on your behalf. If so, you only need to be concerned with making sure you file and remit the tax with the correct authorities. Definitely worth checking to see if sales tax collection is already happening for you via your online platform.
What are your concerns with sales tax collection for your small business?