March 19, 2020

Remote Retailer Sales Tax Obligations

Small Business
Ronald B. Allen

One of the advantages of selling goods online used to be that you did not have to collect sales tax from out of state customers. And, of course, the customers loved it because they were not paying the sales tax that would be charged at one of their local stores. However, that is all changing. If you sell goods via the internet to customers in different states you will more and more have remote retailer sales tax obligations in many states as well as notice and reporting obligations in those and others.

Specific Remote Retailer Sales Tax Obligations and Other Issues

The first issue we look at is where and when you will need to collect sales tax on things that you sell. The second is when you will need to notify your customers that they have a tax obligation to fulfill. The third is when you will need to send reports to your customers reminding them of what they purchased in the previous year. And, the forth is when you will need to send a report to each state taxing authority identifying your customers by name and address and reporting what they purchased!

When Does a Remote Retailer Need to Collect Sales Taxes?

Whether or not a remote retailer is obligated to collect sales tax on a sale in a given state is first of all defined by just how “remote” the retailer is. The term used in this discussion is “nexus.” In regard to remote retailers needing to collect sales tax, having nexus means that you have a permanent or temporary presence in the state. That can be because you own a warehouse there, have a distribution center there or simply go to a yearly trade show where you make sales.

But, the new wrinkle is that after a U.S. Supreme Court Decision on a case from South Dakota in 2018, a remote retailer can now also have an “economic nexus” as well. This is defined by total dollar amount of sales within a state or by total number of sales during a calendar year.

More and more states are enacting laws in regard to remote retailer sales tax obligations and, as one might expect, every state law is a little different. Before this “sales tax obligation tsunami” washes over your online business, contact us at Exigo Business Solutions in the Kansas City area. We can help you know which states are where you may need to collect, what the dollar amount for number of sale thresholds are for needing to collect. And we will help you with efficiently and cost-effectively keeping track of a lot more paperwork than you have been used to.

Remote Retailer Obligations to Notify Customers of Their Tax Liability

If you thought that you are off the hook because your sales numbers are too low to trigger an economic nexus definition of your business, think again. States are not satisfied with just going after the big guys. They want the smaller remote retailers to help them collect taxes as well. And, in this case we are talking about both sales tax and use tax.

If you are familiar with the term, a use tax is explained by the Sales Tax Institute.

Use Tax is defined as a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. Use tax is a complementary or compensating tax to the sales tax and does not apply if the sales tax was charged.

If you need more clarification of this issue please talk to us at Exigo Business Solutions in the Kansas City area.

As a practical matter for states, use tax is rarely collected because it is not reported and too costly for states to audit and recover on this tax. But, you the remote retailer have provided these folks with a means of ferreting out the folks who are not paying this tax!

What states now want you to do after another U.S. Supreme Court decision on a case from Colorado is provide a notice at the time of sale that the buyer is obligated to pay a sales tax on what you just sold them or a use tax if that is what applies. This is pretty painless as you simply need to add that notice to your sales invoice.

The other notification is that at the end of the year you will need to send each and every customer a summary of what you sold them with a reminder that they need to pay sales or use tax as appropriate on those items. This is a larger concern because you need to keep track of sales by customer and send emails to each and every customer and try not to sound too much like the right hand of their state taxing authority.

Remote Retailer Sales and Use Tax Reporting Obligations

This is the report to the state taxing authority. In states that now require this, and in states that soon will, you need to send a complete list of customers, what you sold them, dollar amounts, and identifying information to the state. This, obviously, assists the state in collecting taxes from folks who otherwise would not bother.

How Do You Deal With Remote Retailer Sales Tax Obligations and Related Issues?

We can give at least some of the states credit for being reasonable. For example, Iowa just passed a law specifying the number of sales and gross sales amounts needed to qualify for economic nexus. If your sales from 2018 exceed the limits, you will need to collect taxes on all sales for 2019. If your 2018 numbers were too low to qualify but your 2019 figures exceed either limit, you will only need to collect going forward for the rest of 2019 but will need to collect on all sales for 2020.

But, how would you know this? Here is where you need competent assistance with the issues of sales tax collection, notices, and reporting as this “tsunami” washes across all states.  An institution called the Multistate Tax Commission is working on standardized legislation that would allow each and every state to pass laws requiring sales tax collection, notices, and reporting. From what we understand, both Hawaii and New York are getting ready to pass these sorts of laws.

As with all issues in business, understanding the issues and dealing with them cost-efficiently is the key to keeping overhead down and taking advantage when possible. Work with us at Exigo Business Solutions to review your situation in regard to remote retailer sales tax obligations and related issues.

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