We are in the midst of the busiest shopping season of the year. A time many retail businesses rely on to meet their year-end numbers. But what happens when a world still rocked by the pandemic continues to make the majority of its sales online?
eCommerce has become a growing and important aspect of retail sales. In fact – Cross-border eCommerce sales worldwide grew more than 20% in 2020 while U.S. eCommerce grew by more than 40%. Other reports show that eCommerce made up roughly $1 out of every $5 spent on retail in 2020, up from about $1 out of every $7 spent in 2019. By 2040, an estimated 95% of all purchases will be through eCommerce.
But how does this impact your sales tax obligations? Things are pretty straightforward for your standard brick and mortar store – if your product is taxable, you charge the sales tax rate in effect at the store location and remit it to the proper jurisdiction(s). But, selling into multiple states potentially without a physical presence, gets a bit more complicated.
For more than a decade, states have attempted to determine the best approach to force businesses selling online (or remote sellers) to collect sales tax. For many states, sales tax is the single largest revenue source and thus critical to a balanced budget. The dilemma was that states had to work within a legal framework whereby a state could only require a remote seller to collect sales tax if they had a physical presence in their state. Remote sellers by definition did not have a physical presence and thus the issue. The Wayfair decision in 2018 changed things and gave states the authority to establish economic nexus standards that applied to remote sellers located outside of their state but selling into their state. As of today, all states that have a state-wide sales tax have jumped on the opportunity to establish revenue thresholds (and, in many states, transaction thresholds). If these thresholds are met, the business has a sales tax obligation to register, collect and remit sales tax. Thus – as your business grows online, so does your nexus footprint (sales tax obligation).
Once you have the obligation to collect and remit sales tax, choosing the right shopping cart is important to ensure you charge sales tax correctly. Some shopping carts are designed to facilitate sales in a limited geographic footprint. Specifically, these shopping carts require the remote seller to establish “tax codes” where a single sales tax rate applies to all purchases within that tax code. Some of the more basic shopping carts manage sales tax in this method. These solutions can be effective if you are selling into states with a flat sales tax rate or are only required to collect sales tax in a few, isolated geographies. They become problematic when you have a nationwide requirement to collect and remit sales tax including managing state, county, city, and district level sales taxes.
For more complex sales tax requirements, shopping carts will often integrate with sales tax-specific software solutions. Shopify Plus and BigCommerce have these types of integrations which tend to be the most seamless way to ensure the correct sales tax is charged.
Understanding the capabilities of the cart you choose and ensuring you have a way to accurately calculate the appropriate sales tax is a great start to managing your overall sales tax compliance obligation.
But managing your overall sales tax compliance involves more than a shopping cart and accurate calculations. There are multiple steps you need to follow to remain compliant, many of which you must manage monthly, or even multiple times a month. An accurate compliance process should include:
- Monitoring sales tax nexus on a state-by-state basis
- Determining the taxability of your products and services within each of the states you have sales tax nexus
- Managing exemption certificates
- Registering and renewing sales tax ids in states in which you have an obligation
- Preparing and filing sales tax returns based on your filing frequencies
- Paying the respective jurisdictions where you are registered for sales tax and maintaining a paper trail to include proof of mailing
- Developing a notice management process to ensure jurisdictional notices are responded to in a timely fashion
- Maintaining documentation in the event of turnover or a change in personnel
- Creating bandwidth to address customer questions and internal business questions related to sales tax
- Managing sales tax audits and responding to nexus questionnaires issued by the jurisdictions
- Maintaining an accurate tax calendar to include changes in filing frequencies, changes in filing methodologies (paper vs. e-file), and changes in payment methodologies (prepayments, check, and/or electronic payments)
If you’re worried about tripping some new nexus thresholds this holiday season, it’s best to get in front of it. If you don’t have time to keep up with it yourself, it’s best to look at outsourcing options. TaxConnex is an outsourced sales tax service provider who can take sales tax off your plate – get in touch to learn how we can help!