New Sales Tax Rules for Online Sellers

Updated: Dec 1, 2021

Americans do more and more of their shopping online. E-commerce promises low prices, wide selection and buy-from-home convenience. But, compared with brick-and-mortar shops E-commerce have a dramatic advantage: many of those sales were, in effect, tax-free.

The Supreme Court on Thursday 21, 2018 moved to close that loophole. Now internet retailers can be required to collect sales taxes even in States where they have no physical presence.

President Trump wrote on Twitter that decision was a “great victory for consumers and retailers”.

“Retailers have been waiting for this day for more than two decades,” said Matthew Shay, chief executive officer of the National Retail Federation.

“This ruling clears the way for a fair and level playing field where all retailers compete under the same sales tax rules whether they sell merchandise online, in-store or both.”

This decision allows States to require out-of-State online businesses to collect sales tax from customers in other States.

For example, an online retailer from Illinois who sold goods to a customer in Wisconsin would have to calculate and collect the Wisconsin tax.

This is a very big deal, not only for Amazon but for all small businesses everywhere.

Small sellers will be suffering with heavy costs for obeying the rules for thousands of products in thousands of taxing jurisdictions.

Marketplaces such as eBay, which depend on millions of small merchants selling goods on their platforms, are now pushing for federal legislation providing exemptions for small businesses.

What You Should Know as a Small Business Online Seller:

If you sell goods online from your own address in Illinois and do not have a business presence in other States, you have “nexus” with Illinois only. But if you send products to a large online company that distributes them to buyers for you, you may have connections in many States in addition to your own.

Here are the basic steps entrepreneurs need to know, regarding sales tax.

  • Where do you currently collect sales tax?

  • Sales taxes on services, food, prescription drugs and all sorts of products and services can vary widely from State to State. Determine if your typical sales are subject to sales taxes. Several types of sales can be exempt from sales tax.

  • Alaska, Delaware, Hawaii, Montana, New Hampshire, Oregon have no sales taxes. So, if you are selling in these States, you can not to add sales taxes to the customer’s total bills.

  • If you have a storefront location, you need to charge and collect sales tax on your sales. This is considered a “nexus” or a physical presence in an individual State. For example, any the following situations create a nexus in a particular State:

  • A warehouse in the State

  • A store in the State

  • An office in the State

  • A sales representative in the State

  • Do you use Amazon’s FBA program (Fulfillment by Amazon)? If so, figure out in which states is Amazon storing inventory. That relationship could require you to collect sales tax from customers in areas where Amazon does business.

  • You should discover which tax rules apply for that State. Like South Dakota’s tax system includes more than $100,000 in sales or 200 transactions annually, 16 states already have laws like South Dakota’s that could let them require tax collection by internet retailers in the coming months, and more could follow quickly.

Marty Jackley, South Dakota’s attorney general supposed that South Dakota would be able to begin collecting sales tax on online purchases in 30 to 90 days.

“Other states will have to change their laws if they want to take advantage of the decision,” said Hayes Holderness, a law professor at the University of Richmond. He predicted a flurry of activity in legislatures.

What to do for Small Online Business Owners:

  • Start gathering data on gross revenues and the number of transactions including where the company sells goods.

  • Prioritize States with the greatest economic impact and create a plan to register and collect and remit sales tax.

  • Review your invoicing and controls. Errors of invoicing will influence your customer satisfaction and risks of losing orders.

Good luck under the new rules!

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