5 Keys to Sale & Use Tax Success for eCommerce and Online Retail
As a business, you probably engage in eCommerce and online retail in some capacity. You might sell directly to customers around the country via a website or you could list your products on a platform like Amazon. Recent developments in state and federal law, such as the Wayfair decision, have expanded the sale and use tax implications for online retailers that now face a wide range of multi-state tax issues. Whether you are new to eCommerce or have been at it for decades, take a moment to read our 5 keys to success that cover some of the most important topics in sale and use tax for doing business online.
1. Know if You Have Economic Nexus with a State
Before the Wayfair decision, state revenue and tax departments could generally limited sales tax collection obligations on businesses that had sufficient physical contacts (i.e., nexus) with the state. For example, leasing or owning real estate, having employees in the state, and other methods of conducting business. For online retail, the burden was usually on the buyer to pay the appropriate use tax on the purchase. Now, states can impose sales tax responsibilities on out-of-state online retailers through economic nexus, which looks at the amount of business a retailer does in the state through internet sales and other non-physical methods. If you have economic nexus under a state’s laws, you have a duty to obtain a seller’s permit, file tax returns, and pay sales tax.
Each state has its own policies and guidelines for determining what constitutes sufficient economic nexus by looking at either your gross revenue or the number of transactions you have in the prior year. Many states set their thresholds at $100,000 in sales or 200 transactions. However, some states—like California—have a higher threshold of $500,000. eCommerce businesses and online retailers should also be mindful of other issues that can complicate the economic nexus calculation, such as:
- Sales made through marketplace facilitators.
- Nontaxable or exempt sales (e.g., sales for resale).
- The applicable period for calculating economic nexus (i.e., the prior or the current calendar year).
Again, each state will have its own policies on the inclusion or exclusion of the bulleted items in determining whether you have nexus as an online retailer. Consider meeting with a sales tax professional to conduct an economic nexus study for states where you have customers or deliver products. If nexus exists, your next step might be to consider the benefits of participating in the state’s voluntary disclosure program.
2. Establish Sales Tax Obligations with Your Marketplace Facilitator
Another complicating factor in your sales tax obligations as an online retailer is the use of a marketplace facilitator to process your transactions. These are platforms like Amazon, eBay, Etsy, and others that list your products, process payments, and, in some cases, manage deliveries. When working with a third party, it’s important to know which of you has the sales tax reporting obligations for the items sold.
Many states impose the same economic nexus standards on marketplace facilitators as they do for online retailers, which means they could have a requirement to file returns and pay sales tax. However, some states hold both the facilitator and the marketplace seller responsible, leaving the parties to decide who will collect and remit the tax. For example, a California court in a recent decision affirmed the CDTFA’s discretion to hold a marketplace seller responsible for the sales tax owed on items sold through Amazon.
The takeaway is simple when working with marketplace facilitators—have written agreements that explain who is responsible for sales tax and obtain records indicating sales tax has been collected and remitted to the appropriate state or locality.
3. Look Out for Local Sales Tax Rates That Could Apply to Internet Purchases
When a business makes a sale, the combined tax rate of the place where the transaction (i.e., the transfer of property) occurred will generally apply. In the context of eCommerce, this is often the place of delivery. Some states have a uniform tax rate that applies everywhere in the state while others have local rates that apply at the county or city level. Your combined tax rate is the total of all applicable rates and is what you generally collect at the time of sale.
Online retailers must be aware of the combined sales tax rate in effect at the time to avoid undercharging or collecting excessive amounts. Both can lead to trouble for businesses in the form of additional tax liability to the state or liability to customers.
4. Know How Sales Tax Applies to Delivery and Packaging Charges
With eCommerce and online retail, charges for delivery and packaging are inevitable. It’s important to know how every state you deliver into applies sales tax on the related charges. States are split in their taxation of delivery fees with some exempting them from tax when stated separately on the invoice and others taxing the entire charge regardless of the invoice. Others take a middle-ground approach by exempting charges for actual costs incurred from carriers like UPS or FedEx and only imposing sales tax on charges in excess of the actual cost (e.g., California). Again, each state has the right to establish its own sales tax rules for delivery fees, and the burden is on the online retailer to know how it applies in the states where they have nexus.
5. Pay Use Tax on Your Business’s Out-of-State Expenses
Much of the discussion has been about the sales tax you must collect and pay to the state on the items you sell. However, online retailers and others with multi-state sales tax should also pay attention to their use tax obligations. When you buy personal property for use in your business, you generally pay sales tax at the time of purchase, unless a manufacturing exemption or another exception applies.
But what happens when you buy that property and use it in another state? You could owe use tax to that state depending on the nature of the property and its purpose in your business. Of course, payments of sales tax to another state could offset some of your use tax liability in another state through the receipt of credits, if available. Knowing the use tax obligations in the states where you conduct business will help you make timely reporting and payment, which can lower the risk of surprise assessments after an audit.
For more information and insights on sale and use tax compliance as an online retailer or eCommerce business, check out our state guides. Then, schedule your free consultation with one of our sale and use tax professionals to address your company or client’s needs. We offer services in all phases of your sales tax compliance, including audit defense, assessment appeals, and refund claims.