March 31, 2020

Non-collecting Sellers, Use Tax, and Report

Small Business

Non-collecting Sellers, Use Tax, and When to Report

A U.S. Supreme Court decision in 2018, (South Dakota v. Wayfair, Inc.), changed things for online retailers. States can now levy taxes on “remote” sales. If you are an online retailer, this has to do with you. Some states tax remote sales and some require retailers to provide notice to their customers and report sales. And, some states may require both, based on the number or dollar amount of sales.

Where and What Are Your Use Tax and Reporting Obligations?

There are a few issues here for online retailers. One is that right now only a few states require that online retailers collect sales and/or provide notice to customers of their obligation and/or report sales to the state. And, fewer states have any penalties for noncompliance. But, this is likely to change over the years as states really want to collect what they consider to be “lost” tax revenue as retail sales have moved online and out of mom and pop retail stores that previously paid sales tax.

The next issue is that states vary in terms of their requirements for collecting sales tax, providing notice to customers, and providing reports for the state. And, as more states join the fray, this will continue to change. If this is already getting worrisome and more than a little confusing, contact us at Exigo Business Solutions in the Kansas City area for help.

This year you may have no legal need to report, collect, or notify and next year the law might change. Or, hopefully, your business prospers and your sales volume goes up. This becomes a mixed blessing because now you may have crossed a threshold and need to comply with a set of laws where previously you did not. Don’t get in trouble because you are ignorant of the law. Work with experts like Exigo Business Solutions to stay ahead of this issue.

More States Requiring Tax Collection and Reporting but Different Rules

If this were one Federal law it would be a lot easier for online retailers because there would be one set of rules, one law, and one set of solutions to use to comply. This all started with laws passed within the last decade. And, as one state finds success in collecting sales and use tax, more will follow. Unfortunately, every state legislature will have its own issues and own solutions. So, you will need to be up to date on every state and every regulation.

How will you need to register? What shape will compliance take and at what cost to your business overhead? And, how are you going to integrate all of this information with your tax accounting so that you can take the appropriate deductions? The plain fact of the matter is that states will make their notice and reporting requirements complicated and difficult in an effort to drive you to collect sales tax with each online sale.

States Intend to Win the Sales Tax, Reporting, and Notice Battle
States Intend to Win the Sales Tax, Reporting, and Notice Battle

States Intend to Win the Sales Tax, Reporting, and Notice Battle

Although all of the state laws will vary in their details, making your business life more difficult, they will be set up so that the state wins. They will drive retailers to collect taxes. Or they will browbeat taxpayers in their states to pay taxes because you will have reported the sales to the state. And, your customers will be frightened or irritated that you are notifying them of a tax obligation on an online sale. Of course, the end game for the state is to collect taxes or to drive customers back to brick and mortar stores within their states.

What Is the Point of the State Asking for Use Tax Information?

Use tax is typically not paid. A fair estimate is that perhaps 2% of all taxpayers report and pay use tax. And, it would be cost-prohibitive for states to try to track down all use taxes via audits of every single person’s taxes! But, by leaning on you, their job becomes easier. You are now the tool of “big brother” as you report to the state and scare you customers with notices.

If you want to keep doing business within a state you need to find ways to provide notice to customers of their tax obligations without seeming to be the tax collector’s best friend. And, you need to make sure that your yearend reports to your customers are seen as helpful rather than threatening. To make sure that you get this right, work with the pros at Exigo Business Solutions to make the process as pain-free, efficient, and inexpensive as possible.

Specifics of Non-collecting Seller Use Tax Notice and Reporting

In general, current laws and laws to come will require that you, the non-collecting seller, always tell your customers (notify) that they are obligated to pay a use tax. Furthermore, you will have to send these folks a year-end summary of all purchases and amounts along with a reminder of their tax obligation. And, of course, you will need to send the state taxing authority a “customer information” report with all sales to all customers. In states where you did not sell much, you may have no obligation but, you need to know in order to stay out of trouble.  

Notifying Customers

This happens at the time of the sale. Your sales invoice will contain this information and it may need to be done in such a way that it meets the rules of every state. For example, it may need to be prominently displayed or in a font size that makes the message obvious.  

Purchase Summary Sent at Year End

Each state will its own date but basically, at the end of the year, you need to send each customer a list of their purchases by date, amount, type of item, and sales tax information as appropriate.

Then you will need to clearly tell the customer that they have a requirement to pay sales or use tax on their purchases. And, your report will need to pass on the information that you also reporting all of their purchases to the state taxing authority as well.

It may or not be required that you let people know which items will be subject to taxes but it will probably be better received if you come across as being helpful in a difficult situation. The state may or may not require that you provide the customer with instructions for how to make payments.

Report to State of All Customer Information

The report that you will need to send to the state every year will need to include all customers, all sales, all amount, all items, and the customer’s name and addresses both for billing and shipping. If you are lucky they may only want a total dollar amount. But, because some states will want more information than others, you will need to set up your accounting system (QuickBooks or other) to contain the most possible information just in case.

States That So Far Have Enacted Non-collecting Business Tax Reporting Laws
States That So Far Have Enacted Non-collecting Business Tax Reporting Laws

States That So Far Have Enacted Non-collecting Business Tax Reporting Laws

As of this writing, here are the states you need to be concerned with in regard to reporting and tax notice laws. They are listed by year that their law was enacted.

2011

South Dakota

2013

Kentucky

2016

Oklahoma

2017

Alabama
Colorado
Louisiana
Puerto Rico
Rhode Island  
Vermont      

2018

Pennsylvania
Washington

2019

Connecticut
Georgia
Iowa

More states, including New York and Hawaii, are actively considering laws to this effect. And, work is being done by the Multistate Tax Commission which may help standardize these laws, making it easier for more states to follow the example of others.      

Legality of Reporting and Tax Use Requirements

If you are hoping that someone appeals one or more of these laws and gets it overturned, you are out of date and in for a rude shock. The first of these laws go back to Colorado in 2010 and South Dakota in 2011. Both were challenged and ended up in the U.S. Supreme Court where their legality was upheld.

How Do You Deal with Taxes and Non-collecting Seller Use Tax and Reporting Requirements?

The best advice is to deal with these issues using the advice and guidance of experts who have followed this from its inception and deal with it with numerous clients already. Exigo Business Solutions can help an online retailer in several ways. First, we can help you know which states to be concerned with and what dollar amounts will trigger these requirements. Then, we will be pleased to help you set up your accounting and tax preparation software in such a way that the bulk of these issues are handled automatically with minimal expense and waste of time.

For help dealing with the new non-collecting seller use tax and reporting requirements, contact us today at Exigo Business Solutions in the Kansas City area.

Marketing List Maintenance and Tune-ups

Small Business

Increase Your Work Efficiency

Small Business

Office 365 on Windows, Android, and iOS

Small Business