Top 5 Sales Tax Considerations for e-Commerce Businesses
1. Wayfair and economic nexus thresholds
Summer 2018 saw a drastic shift in the sales and use tax landscape due to the landmark South Dakota v. Wayfair Supreme Court ruling. In a 5-4 decision, the Court ruled that states can require businesses to collect and remit sales tax if they meet certain thresholds. The South Dakota threshold amount was determined to be 200 transactions or $ 100,000 in gross sales. Since that ruling the domino effect has cascaded across the US with all states having enacted a similar form of legislation. Business need to be paying attention to their sales and number of transactions in every state where they are making sales, and they need to know the economic nexus thresholds in those states. Because once they are crossed, it’s time to register, and start the collection and remittance of sales and use tax.
2. Product taxability
Another important factor to understand in tackling sales tax is learning how your product or products are taxed in different states. What is their taxability? Clothing will be taxed differently in California, Massachusetts, and Texas. There may be tax exemptions for your product in some states, but not others, and there may be special rules such as a taxable threshold. One example of this is that footwear is exempt from New York state sales tax if the item costs less than $ 110. Certain states also hold sales tax holidays on different products annually. A timely example of this is the emergency sales tax holiday that Puerto Rico has declared on necessary items to help relieve tax burdens on its citizens dealing with COVID-19 impacts. Understanding the general taxability of your products matters.
3. Exempt customers
If business is humming along and a customer presents you with a sales tax exemption certificate, do you or your staff know what they are receiving and how to handle it? Is it required to honor a sales tax exemption certificate? Is this correct documentation? Is it complete? This kind of detail may not seem important until you’re faced with this scenario. Knowing the general rules and pitfalls can save a lot of time. Save your customer service team from this headache, and your accounting staff who could face a future sales tax audit. Tax exemption documentation is important from a purchasing standpoint and a sales perspective. Learn and know the basics.
4. Software and automation
In the world of e-commerce with shoppers making purchases with a click of their mouse and expecting a near instant check-out process, there is no way around connecting to a sales tax calculation software. This type of software is set up to take in to account the correct tax rate based on location, product taxability, and to manage exempt customers. Do a bit of homework to see if the features of the chosen software will best fit your needs. There are no-cost options for small or start-up companies using popular e-commerce platforms. For larger companies there are custom APIs available to more robust calculation engines. Main considerations are usually cost and ease of use.
5. Managing the work
If you’ve chosen a sales tax calculation software and are thinking you’re out of the woods – let’s review the main categories of sales tax related responsibilities: track economic nexus, configure software, register with taxing jurisdictions, manage exemption certificates, manage filing obligations, and address sales tax notices (if you think they can be avoided, you would be wrong). No software can manage all of these important business tasks. It still takes people, or perhaps a person, depending on how quickly you’re growing. Software’s best roles is with tax calculations and filings. Automating everything sales tax related is not realistic. Someone needs to be minding this in any e-commerce business. Perhaps for now you have an office manager or accounting staff who can fill this role internally. There are also options to outsource this service to accounting professionals. Either way, actively managing sales and use tax in e-commerce today is absolutely a best practice.
Contact our Business Advisory team today to help you navigate the sales tax world of an e-Commerce Business