Challenges for Businesses With Ecommerce Sales Tax
Some of us are old enough to remember a time when, if you wanted to buy something, you had to leave your home and go to a store (or order it from a catalog and wait weeks for it to arrive). But for the last few decades, and especially the last few years, there has been another option: ecommerce businesses, also known as online stores or online marketplaces. Now, we have only to imagine what we want, locate it online with a quick search, and purchase it in a few clicks.
In some cases, ecommerce businesses are online extensions of brick-and-mortar stores; in others, the entire business is operated over the Internet. Ecommerce offers convenience not only for customers but also for business owners.
While online marketplaces are sometimes run by large corporations, hundreds of thousands of these businesses are operated by sole proprietors, small limited liability companies, and other small business entities. If you have an online business, you need to be aware of your ecommerce sales tax obligations. Failing to charge, report, or pay taxes appropriately could cost you a great deal—and perhaps put you out of business. Here’s what you should know.
Tax Burdens for Online Businesses
There are many advantages to doing business online: lower overhead, wider reach, and greater flexibility. But those benefits come with a price: dealing with the ecommerce sales tax laws of the various jurisdictions with which the business has a nexus. A “nexus” is a legal term for a connection between your business and a state.
Nexus Between Your Business and a State
If there is a nexus between your business, operated in Ohio, and another jurisdiction, say, Illinois or California, you will likely have tax obligations to that state, such as the obligation to collect, report, and remit sales tax. Usually, there is considered to be a nexus between a business and a state if the business has gross revenue above a certain amount in that state, or has more than a certain number of transactions in the state.
Let’s say you started bottling hot sauce and selling it at local farmers’ markets, gradually expanding to online sales. Now, imagine that your ecommerce business is selling and shipping hot sauce to all fifty states, plus a couple of foreign countries. Think about keeping up with the nexus laws of all those jurisdictions—even as those laws evolve and the level of your business in each state or country grows or shrinks.
Registering for a Sales Tax Permit
Before you can start collecting and remitting ecommerce sales tax, in most jurisdictions, you must register for a sales tax permit. A sales tax permit, also called a sales tax license, vendor license, or sales and use tax permit, is a document that authorizes a business to make retail sales and collect sales tax on purchases. As with failing to report sales tax collected or remit it to the jurisdiction, failing to register for a sales tax permit where required can lead to serious penalties.
While not all states have a sales tax, those that do generally require a sales tax permit. Even states that do not collect sales tax may have municipalities within them that do. Therefore, you cannot assume that no permit is required if you are operating in one of those states.
In-State and Out-of-State Sales
Even as your business expands to make sales in other states, it is likely that it will continue to do business in the state in which your operations are physically located. In-state (intrastate) sales and out-of-state (interstate) sales may be treated differently by taxing authorities.
It is possible that your business’s home state exempts some goods from sales tax when they are purchased and shipped out of state. Those same goods, shipped to a location in the same state as your business, might be subject to ecommerce sales tax. It’s important to be aware of how your jurisdiction treats both intrastate and interstate sales for taxation purposes.
Ecommerce Sales Tax Calculation, Collection and Reporting
In the olden days of the late 20th century, if you owned a small business it would likely be operating in only one state, perhaps only one municipality. You would only need to be aware of the sales tax laws and reporting deadlines of your state and town. But now, when it’s possible for your business to have a nexus with dozens of states, you must be prepared to collect, file, and remit sales tax to all those jurisdictions in a timely fashion. Failure to do so could lead to significant fines and penalties, and perhaps even criminal prosecution.
To add another layer of complexity, ecommerce sales tax rates change with alarming frequency. You need to keep up with those changes. Like failing to collect sales tax altogether, failing to properly calculate the amount of sales tax owed on a purchase can subject your business to penalties. In addition, you must understand how to process and report sales tax refunds on purchases that are returned.
There are a lot of moving parts to sales tax compliance, even within a single state. When you are dealing with multiple jurisdictions, there are even more details to keep up with.
The Bottom Line
Ecommerce offers boundless opportunities, but there are also numerous tax challenges for an online business. To get help with ecommerce sales tax issues so that you can focus on growing and running your business, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.