This is a guest post by Alex Koral is an Industry Outreach Analyst for Sovos. Alex joined Sovos after graduating from the University of Colorado Law School in 2015, initially working as a legal researcher for beverage alcohol regulations. Since joining, Alex has branched into sales tax regulations serving as a subject matter expert for the Taxify product market.
Congratulations! With a lot of work and perhaps a bit of luck, you have a thriving e-commerce business. Whether working through an online marketplace, like Amazon, or your own site, you’re connecting with thousands of customers across the country and bringing in a strong revenue stream. Time to relax and enjoy your success, right?
Unfortunately, that’s not always the case. It’s likely that you’ve been putting off a big and complicated obligation that’s been looming, but never dealt with: your sales tax liabilities. You may have been selling for months, even years without doing any collection or remittance. As a result, you may have a large amount of back taxes due, which only gives more credit to the idea to just ignore it and hope it goes away.
Fortunately becoming compliant with your past and future sales tax liabilities doesn’t need to be as difficult as it may seem. In this post, we’ll go through the ways that you can become compliant going forward, avoid some of the pain from missed tax payments from past sales, and show why it’s better to tackle this pain point early on.How do taxes apply to online sellers? #ecommerce #taxes #sales Click To Tweet
What Is Sales Tax, and How Does It Apply to Online Sellers?
Most people living in the U.S. are very familiar with sales tax. Whenever you buy goods at a retailer, whether groceries, clothes, electronics, or something else, a certain percentage of the cost is added to the total sales price. It is collected by the seller from the purchaser, and later remitted to the state or county and used to fund government projects.
In a brick-and-mortar store, this can seem pretty straightforward. But for e-sellers, the world of sales tax can become very complicated. That’s because of a concept called “nexus.”
Nexus is essentially the idea that if a business has sufficient contacts with a region, be it the state or a county, that allows the region to impose a sales tax obligation on the business.
This is complicated for e-sellers, though, as they often sell into regions where they do not have a business location. For example, you operate from a house or store in California, but sell across the country. Because you’re located in California, clearly you owe California for sales made in California. But what about your sales made into New York?
Well, it depends on how you operate your business, specifically in what kind of other contacts you have in New York. Understanding nexus is especially important for e-sellers who use Fulfilled by Amazon (FBA) or similar services. That’s because having inventory stored in a state — even if it’s being stored by a third party like Amazon — creates sufficient contact to establish nexus, thus establishing a sales tax duty in that state.
So, you may have, and may long have had, nexus in a number of states you sell into, not just your home state. In all of these states, you have an obligation to collect and remit sales tax on your sales there.
How Does My Business Become Sales Tax Compliant?
The quick answer is that you need to register with the state Department of Revenue, and receive a sales tax license number, which will allow you to file returns going forward.
But it is critically important that you first determine exactly where you do have a sales tax obligation based on your nexus. Once you register with a state, this means you have agreed to collect, report, and remit sales tax, regardless of whether you actually need to (based on nexus.) Registering everywhere could be a safe way to go about it, but likely you’ll only be creating a lot of unnecessary and difficult work for yourself.
The basic ways to determine if you have nexus in a state are:
1) Do you have physical presence in that state, through a business location or other property interest?
2) Do you store inventory in that state, even through a third party service like FBA?
3) Do you have employees in that state, including temporary workers?
There are other, more complicated ways to establish nexus, depending on the state. If you are concerned about your possible nexus, you may want to consult with your accountant or attorney.
Once you have determined where you have sales tax obligations, then you will register with the states. If you are facing a large number of registrations, or have a complicated business structure, you may want to consider hiring a service to assist with this process.
After registering, the state will issue you a sales tax permit number. You can then begin collecting sales tax from customers and remitting what you collect to the state regularly. If you under collect, you may be required to make up the difference out of your own pocket.
Just because you were not registered before doesn’t mean you didn’t have sales tax obligations. Once you had established nexus and began making sales, you had a sales tax obligation.
There are a number of perfectly valid reasons why e-sellers may delay registering for sales tax, even if they have the obligation to. For one, they may just not realize they have nexus in a location — they may not be aware of that location’s rules, or where Amazon is storing their inventory.
But that delay has built up a backlog of taxes that now must be dealt with. When you registered with the state, you were obligated to tell them when you first made sales there. The state will want to know about the sales you made before registering, and receive the taxes due.
If you have not been collecting the taxes due from customers so far, the amount you need to remit to the state will have to come entirely out of your pocket. However, back taxes are not the only cost consideration. States will also assess interest on back taxes (roughly 3-7%), and will charge a penalty for failure to pay (which averages an additional 20%).
If you are only a few months late, the total obligation of back taxes, with interest and penalties could be very manageable. If you are years late, though, then the total assessment could become huge. Your back taxes could be in the thousands, with thousands more in penalties to pay.
Voluntary Disclosure Agreement
Thankfully, there is a way to possibly avoid these costly penalty payments. Most states have adopted a program called a Voluntary Disclosure Agreement (VDA). Under a VDA, you reach out to the state, admit that you have not been remitting sales tax for sales made in the state in the past, and declare your intention to become compliant going forward. In exchange, the state will agree to not assess the penalties that would normally applied. You will still need to pay the back taxes, including interest, but can avoid the added penalties. You may also be able to arrange a deferred payment plan, if needed.
In order to qualify for a VDA, you must have had no prior contact with the state’s Department of Revenue concerning your sales tax obligations. So if you are under audit already, have been contacted by the state to register for sales tax, or have already registered, VDAs will be unavailable to you.
VDAs are not an automatic fix, though. Even if you apply for one, the state may not accept it. In that case, not only do you not receive the benefits of the VDA, but the state now knows that you are in arrears and can go after you for the back taxes, penalty and all. To avoid this, you can hire a third party service to file your VDA application. These services work closely with the states to bring non-remitting businesses into compliance. But they will not reveal your information until the state accepts the application. This gives you some anonymity, but these services can also be quite expensive. Whether to go that route is one more cost-benefit decision to make.
Sales tax can be a big scary mess. Even knowing when you have a sales tax obligation is difficult to determine. Going through the next steps of becoming compliant — registration, collection, reporting, remittance — can seem even more daunting.
The good news is that help is out there. Just as customers have never before benefitted so much from the easy availability of so many different products being sold over the internet, e-sellers have never before had access to so many supportive services. Finding the right service for your needs can relieve a lot of the stress of being compliant, leaving you freer to grow your business even more..