As sales tax revenues continue to downward spiral, the online sales community is destined to become a piggy bank for the government. A recent decision by Amazon triggered what could be a nationwide wave of changes to state’s online sales tax – and will expose sellers who haven’t been keeping up. Here’s what you need to know about the potential changes and how they could impact your small business.
Amazon Is Handing Over Data to the State
Amid pressure from the Massachusett’s government, Amazon announced this year that it will hand over precious third-party seller data to the state’s tax officials. The data will expose uncompliant online sellers, allowing Massachusetts to go after uncollected online sales tax– and we can expect that the rest of the country will soon follow suit.
Changing Online Sales Tax
Amazon (like most online retailers) does not charge, collect, or remit sales tax for third-party sellers. Instead, Amazon charges sellers to put their items in Amazon’s store but doesn’t add online sales tax when the items are brought to check out. This process leaves individual sellers to fend for themselves.
States weren’t always able to require businesses to collect and remit sales tax unless the business had “sufficient physical presence” (i.e. office presence or a majority of their business conducted in that state). In fact, the issue hasn’t been heard in the Supreme Court since 1993– well before the digital sales era.
This year, the US Supreme Court has decided to review South Dakota v. Wayfair, which will determine if online-only sellers without a store will need to collect state sales tax on transactions with its state residents. This decision is monumental for the entire online sales space and the thousands of small businesses that rely on it.
The Impact on Online Sellers
An estimated 90 percent of online businesses don’t comply with current sales tax collection and remission laws. For these sellers, there’s no more hiding. Amazon’s compliance with Massachusett’s request will likely trigger similar requests from other states. Soon, the states where your clients live will have your data – and come after what’s missing.
State tax departments will likely hire more auditors and target sellers who have fallen short of their tax obligations. Even for those who are currently in compliance, you’ll have to monitor sales across all states if the Court adopts an “economic presence” test to ensure you’re compliant. As you can imagine, things can get out of hand (and unorganized) quickly. Even low-volume sellers may need to hire a tax compliance manager.
Online Seller? Here’s What You Should Do
Assess state tax requirements for your situation: Each state has different nexus rules. For starters, keep an eye out on which states are requesting data and where Amazon is releasing it. From there, you’ll need to take inventory of where you do business – and not just where your office is. For instance, consider your business locations, gross sales, or even the state where you have a third-party warehouse.
Make a plan: The good news is the government can’t hold you responsible for tax on old sales as proscribed by new legal standards. This means your current sales tax obligations will be reconciled against current state laws, even if the Court sets a new standard across all 50 states. You’re not off the hook, though – every online seller needs a sales tax compliance plan moving forward.
Get help from a tax professional: While there are software tools to help with nexus, a tax professional can help with determining where you’re required to collect sales tax and whether you need to file or amend returns. Working with a tool or getting help up front can prevent problems in the future, like owing a debt or being audited, and a competent tax professional can help get you the right setup for your specific business. If you receive a letter from any state regarding owed online sales tax, a tax professional can also help you through both the audit and a debt resolution.
Get ahead of the curve before it hits – and hurts – your online sales and business as a whole.
The experts at Tax Defense Network have been helping online sellers and all types of businesses with sales tax compliance since 2007. We have offices nationwide and offer affordable payment plans to help sellers on any budget.
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