Critical E-Commerce Sales Tax Compliance Questions to Ask
As an E-Commerce Seller (Past or Present), you need to ask several key sales tax compliance questions. The answers to these questions will help determine your success or failure as you sell online.
Are you in Compliance with the New Economic Nexus and the Report States? If You Aren’t, Do You Know the
Best Time to Get Registered without Killing Your Profits?
Not Selling on E-Commerce/Amazon Anymore?
How Will You Handle Past Sales Tax Compliance Issues?
Are you Aware if you Did Not File Past Sales Tax Returns, There are No Statute of Limitations?
Will Foreign Sellers Finally be Shut Down for Avoiding Paying U.S. Sales Tax?
We understand that sales tax compliance sucks! It is a big moving target and pain, but don’t let it destroy your e-commerce business.
Sales tax compliance, especially since the June U.S. Supreme Court Case, Wayfair vs. South Dakota in 2018, has been the biggest moving target that will take 10% off not only your profits but off your gross sales as well. No matter what stage you are at with your e-commerce business, how you handle sales tax compliance will help you evaluate your situation in the future.
In years past, when entrepreneurs were selling a service online or joining a direct sales company, the worst that could happen would be to lose all their money on the courses you invested in. The business would suffer a great loss and must carry that loss forward. Now imagine, on top of that, an extra 10% sales tax bill on 60% or more of all your sales. You may end up dealing with 20 different state departments of revenue audits.
You may be thinking the state won’t waste their time with me; perhaps you only owe them $200 in a state. After a certain time frame, you may think that they won’t come after you, especially if you are seemingly too small. Although that is not always the case, the states run a business, and will most likely go after the big fish first, the ones that owe $25K or more in past sales tax, penalties, and interest.
No Sales Tax Return Filed = No Statute of Limitations
They don’t need to come after you because now there is no statute of limitations since you have never filed a sales tax return. In California, the general statute of limitations is three years for taxpayers who have filed tax returns. This means a state can focus on all the new changes since the June Wayfair Vs. South Dakota Case.
States had, in some situations, have all Amazon Sellers information, and now with more marketplace facilitator states, where the state will collect and remit sales tax on your behalf, they must have your information. At any point in time in the future, the states can send you a notice for past sales tax due. These letters can be intimidating.
See real examples below from past sales tax due to forfeit the ability to do business in a state (crazy).
$558.24 Assessed by South Caroline
$3,179.52 Assessed by Wisconsin
Texas Notice of Forfeiture of Rights to Transact Business
There’s No Need to Rush to Get into Sales Tax Compliance in Every State You have Nexus.
This answer may surprise you, but you must strategically decide on this NEW COST of doing business. You must evaluate the cost of everything involved in the registration and filing process vs. the cost of waiting. You already know about the past sales tax you will have to pay, plus penalties and interest.
You may even know that adds up to about 10% of your gross sales in each state where you have nexus, but you may not know other costs. Those include filing past sales tax returns, penalties on late returns, and the service/labor costs for compliance.
The key is the intersection for your business and the point at which it makes sense to register. What is your “Sales Tax Compliance Tolerance Factor”? Is that $500 per month/per state or even $1K per month/per state in costs? Sales Tax System outlines these factors for you to evaluate better your registration dates moving forward.
In the big picture, here is what you need to know:
- As an e-commerce seller, sales tax compliance is not going away (even with marketplace nexus). You have physical nexus with stock in each FBA state. The major question will become: “Will more states notice the lead with Washington and Pennsylvania, where they collect the sales tax from Amazon, but the seller needs to register for a sales tax permit, file sales tax returns, and note Amazon paid the sales tax?”
- Past sales tax is still due. Washington clearly states that if you had sales prior to January 1st, 2018, you will owe that sales tax plus penalties and interest.
- Economic nexus states. Forty-five states are now also economic nexus states; so, if you are already registered to collect and remit. A few economic nexus states are NOT FBA states, so those are the states you must monitor to determine if you pass the sales threshold, around $100K as a minimum or 200 transactions. You may not be close to $100K in one state in one year of sales, but you very likely will be above the 200 units in sales to another state in a year. This results in more states to register to collect and remit beyond the FBA states.
- Reporting States. Some states require you to either report all your sales to every customer in the state, so they pay the use tax (same as sales tax), or you can register for a permit, collect and remit. The fines are very high if you meet the threshold and don’t report your sales. As you reach the state threshold of sales, the best approach is to register for a permit and collect and remit.
This means you would register to collect and remit in the Amazon FBA states, Economic nexus states, where you reached a threshold that is not already an FBA state (where you are registered), and reporting states where you are not registered.
Questions You Must Answer to Navigate Sales Tax and Grow Your E-Commerce Business Successfully:
- Which states do you have sales tax nexus? That includes physical nexus, economic nexus, and reporting nexus.
- What have been your sales in each state since you triggered nexus?
- What is your current sales tax exposure in each state?
- What does it cost you per month, per state for non-compliance?
- What is the velocity of your sales and the effect on your compliance costs?
- What will happen if you get into compliance before November 1st vs. after the holiday season?
- What is your out-of-pocket cash for services and costs for past sales tax to get into compliance?
- How much time do you have allocated to this part of your business vs. marketing and sales
- What support options are best?
- What are realistic expectations for support?
- What are your cash flow options to get into compliance? Do you finance your past sales tax due and service fees or use your cash earmarked for inventory?
- What do you need to adjust in your budget, moving forward, to determine your business’s profitability?
Are You No Longer Selling via Amazon FBA? If so, Did You Properly Close Out Your E-commerce Business?
No one likes to throw more money at a business that is not working, but there is a balance of taking the financial steps necessary to close the business properly. It is no fun investing more money into a failing business, but it is required. Nothing is worse than quitting at the end and not tying up loose ends that may come back to haunt you 2-3 years down the road.
Here are the Factors to Consider as you Close Your E-Commerce Business.
- When does it make financial sense to go back to a state and pay past sales tax, penalties, interest, past returns, and final returns? Is waiting for the state to send a notification 2-3 years down the road and deal with it at that time a better option?
- What is the big factor most sellers don’t consider, which may make it impossible to even get into compliance?
- What is the process if you ignore all the notices, never get them, and end up with a sales tax lien? What impact will that have on you financially?
- Which states are the most aggressive, which you will want to close out first, and which ones might you choose to wait?
- What are the costs involved in paying a past sales tax debt? It should be simple, but, unfortunately, it is not.
- Were you operating as an LLC or Corporation? Are you safe, or did you dissolve the entity and take a step backward?
Are You a Foreign Seller? If so, please Pay Special Attention to These Questions:
You have another set of challenges when it comes to sales tax. It would help if you gained clarity on the following:
- What will the states do differently to force foreign sellers’ compliance when it comes to the U.S. sales tax? How much pressure will 45 states apply to marketplace facilitators like Amazon, Walmart, Sears, and eBay for sales tax due prior to when they started collecting?
- Did you know that Senators are well aware of foreign sellers not collecting and remitting U.S. sales tax, and they are considering plans to stop and level the playing field?
- Did you know your U.S. federal tax return responsibilities, even if you were selling with a foreign entity?
- What is preventing you from opening new accounts and moving forward?
- What happens when you go to sell your U.S. business and you weren’t in compliance?
- Do you know how to get into compliance if your cash flow is low?
At the end of the day, you must answer all these questions with sound, logical input.