The Risk of Sales Tax Workarounds

As we enter tax season, it’s an important time to remember the key points learned from the Supreme Court’s overturning of Quill, the ruling that online sellers don’t have to collect sales tax unless they have a physical presence in the state where they sell. 

In essence, the Court said that the Quill decision, made in 1992, was made at a time when the justices who decided it couldn’t foresee the new reality of ecommerce. With a virtual showroom in every consumer’s home and an app on many consumers’ phones, online sellers have as much of a presence as local stores, even if that presence is virtual rather than physical. 

What South Dakota Did Right

The Supreme Court mentioned three specific things that South Dakota did that made their case compelling:

  • They set limits that leave the smallest online sellers out of the picture. Remote sellers only have to charge sales tax in South Dakota if they have 200 transactions or $100,000 in revenue originating from South Dakota. The average ecommerce basket is just $82.00, so a company with 200 transactions might bring in much less than $100,000. Still, people shipping a few designer puppies or handcrafted mugs each year to several states will not be affected. 
  • They specified that sales tax would not be charged retroactively – no surprise audits of sales in 2017 will be taking place. 
  • They are among the states that have adopted the Streamlined Sales and Use Tax Agreement. This means that their sales tax definitions are more consistent than many other states.

These aspects of their sales tax law made it less likely that their law would put an “undue burden” on sellers from other states. The Commerce Clause of the U.S. Constitution makes it illegal for states to discriminate against companies in other states and make it hard for them to do business.

21 states have made laws requiring online sellers in other states to collect and remit sales tax on their transactions. Some states have set the limit for collecting sales tax as low as $10,000 a year. Some states are already going to court to defend these laws. States with very complicated or very aggressive requirements might find their laws overturned. 

Under these circumstances, it might seem practical to wait until the court cases are over and all the states have made up their minds before taking any action. States will change their laws and there will be court challenges of the laws. There are a lot of possible outcomes. 

Why does this matter to your company today?  The pandemic has dramatically accelerated eCommerce sales around the world.  As we get closer to a post pandemic phase, the state auditing of Sales and Use Tax compliance will become a greater priority for enforcement agencies.

Workarounds

We’ve heard of quite a few casual “solutions” to the possibility of being required to charge sales tax. Some remote sellers figure they could just add 10% to their prices and set that aside in case they end up having to pay sales tax at some point. 

This is not a solution. It is illegal to charge sales tax without registering first. All online sellers who are required to charge sales tax are also required to show the tax on their receipts. Some states require sellers to show that tax on their receipts (or, sometimes, in a letter of notification at the end of the year) to their customers, even if they don’t collect sales tax. The consumers, not the sellers, are required to pay sales tax. 

Sellers are required to calculate, collect, and remit the tax. They must prove that they are complying with sales tax laws and collecting accurately. Setting aside 10% is not going to cover these requirements. 

We’ve also heard people say that they will just keep their sales under the thresholds for each state. After the 199th transaction in South Dakota, they will not accept any more orders from people in South Dakota. 

This also is not a solution. It could be a customer service and public relations nightmare, but it’s not practical for accounting, either. Some states allow sellers to register and collect sales tax after they reach the threshold. At this point, though, it is not safe to say that all states will do this. A state could say that any seller who had $10,000 in transactions in 2017 would be required to collect sales tax in 2018. They might not have to remit the tax if they didn’t reach the threshold, but they would still have to comply. 

Monitoring sales to stay under the thresholds would require a degree of precision that most ecommerce systems can’t support. 

We’ve also heard sellers explain that they plan to make a spreadsheet. Any company small enough to handle nationwide sales tax collection and filing with a spreadsheet is probably going to come in under those thresholds. Middle sized companies needing to comply with sales tax laws in multiple states will regret that spreadsheet plan. 

These ideas aren’t practical, but they show why waiting to see what happens could backfire. Complying with sales tax law is difficult enough if you’re doing it right. Trying to skirt around it is a disaster waiting to happen. 

Preparation

Take a realistic look at your sales records and forecasts. If you sell in multiple states now and expect to continue to do so, your best bet is to plan to collect sales tax in the 45 states that currently have statewide sales tax collection. 

The Wayfair decision brought up the question of “undue burden” on smaller online sellers. Their solution? Software. 

They’re right. Automating the calculation, collection, and filing of sales tax is more practical than the workarounds you may have been considering. A tax calculation tool customized for your business, a filing solution that alerts you to possible errors, and an expert back up team can make the sales tax burden manageable. 

If you have questions about sales tax compliance for your company, feel free to reach out to our CEO at Noel Hamm, at nhamm@salestaxdatalink.com for a free consultation. 

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