Why eCommerce Sellers Should Collect Online Sales Tax
The success of the online marketplace means that state revenue departments are putting more time and resources into collecting sales tax from eCommerce sellers.
FACT: Amazon currently reports to have over 100,000 vendors selling more than $100,000 each annually, and nearly half the items they sell are from third party vendors.
Amazon has announced that they will voluntarily start collecting sales tax from all 45 states that charge sales tax. Does this mean that Amazon/FBA sellers no longer need to be collecting sales tax? No. Not yet.
Sales tax can be confusing and daunting, which is why many eCommerce sellers are not collecting sales tax. They want to be compliant, but they don’t know where and how to begin.
FACT: Sales tax collection and remittance is not an optional process. It is required by state laws. Choosing to ignore it is a risk businesses cannot take.
Sales Tax Compliance Basics
If a seller has inventory (including inventory in an Amazon fulfillment warehouse) stored in a state, then (in most states) the seller has "nexus" in that state. What is nexus? It is the legal term to indicate that sufficient presence exists that determines whether or not a company has the statutory obligation to collect sales tax.
FACT: If you sell FBA (Fulfillment By Amazon), you have nexus in most states where Amazon stores your inventory. New York is one exception, as they do not consider 3rd party warehouse storage to be a nexus creating situation.
Amazon currently has fulfillment centers in 24 states and will be opening more later this year. How many of these states do you have nexus in as a FBA seller? You can find out by pulling an Amazon inventory report or using a tax filing software (such as Tax Jar) that aggregates your sales data and shows your nexus states. Even if you are selling as "merchant fulfilled", you still have nexus in your home state and need to register and collect sales tax there.
How to Register for Sales Tax
Registration can be complex and time-consuming, if you don't know what you are doing. Each state has a different method for registration. These registration processes are usually set up to accommodate “brick and mortar” businesses and translating the process for eCommerce businesses can be confusing. The goal is to obtain your tax permit and minimize risks. For most FBA sellers, outsourcing sales tax registration allows them to focus on value-added activities that grow the business. But for do-it-yourselfers, the first step is understanding the following:
Tips to Picking the Right Effective Date
Choosing your effective date is an important part of the registration process. What is your effective date? It's the calendar date when you first established nexus and started doing business in a state. The Department of Revenue will expect sales tax to be collected and remitted from your effective date going forward.
FACT: If your effective date is in the past, be prepared to file and remit back taxes to the state, even if you didn't collect any tax. Fees and penalties also are often incurred. You might need a Volutary Disclose Agreement.
Knowing when to register to collect sales tax is important. If you wait too long (until your business is established), you could be liable for a large past-due tax bill. On the other hand, if you register before your sales are materialized, you could spend countless hours and hundreds of dollars in compliance to file $7.00 in sales tax. It becomes a business decision as to timing. The ideal time is to register when the cost of compliance is less than the cost of non-compliance.
Help is Available
The process of registering, collecting and remitting sales tax is tedious and tiresome, especially if you are trying to play catch up. Getting your business registered with the right states needs to be completed quickly and correctly to minimize your risk and exposure. The longer you wait to register and collect sales tax, the more the liability falls to you.
eCommerce sellers need to collect and remit sales tax when and where it is required by law. Since the when and where is rapidly changing, and the registration process is complicated, reach out for help so you can be in compliance with minimal impact on your time and resources.
Contacting a Department of Revenue for information may lead to even more confusion. Find out how to handle eCommerce sales tax compliance by recruiting help from eCommerce/FBA registration experts, such as Windward Tax.
If you have a question or want more information about sales tax for eCommerce sellers, click the cart above or here.
(CNNMoney (New York) First published March 29, 2017)