Key information such as effective dates, thresholds, and includable sales for out-of-state sellers making sales into states that have enacted economic nexus legislation both before and after the South Dakota v. Wayfair Supreme Court decision.
Picture this common business scenario in the Internet age: Your company has historically only sold its products from a physical store but decides to grow its business by selling online on its own website.
Adding a new online sales channel requires some system and operational changes. You may need to enhance your website, change your marketing strategy, or hire new personnel. One potentially overlooked aspect of broadening your customer base that cannot be ignored is the impact on your sales tax obligations.
When your company delves into the world of online sales, there are four key things you need to sort out to be in tip top shape for sales tax compliance. Let’s dig into each one.
The number of states you sell to will likely grow as you make online sales. You must pay attention to each new state’s sales tax nexus laws to understand if you are required to collect tax on your online sales.
Most states now have economic nexus laws that require sellers whose sales revenue or number of transactions exceed certain economic thresholds to register to collect tax.
Economic nexus is the new reality for sales tax and a major concern for online sellers. You must carefully monitor your sales revenue and number of transactions into each state and keep track of each state’s variation on economic nexus so you can register to collect tax as necessary.
Online sales will require online shopping cart infrastructure on your company’s website. An effective shopping cart must include a sales tax solution at checkout that ensures compliance. To find the shopping cart that best meets the needs of your company, you will have to make a series of evaluations. Here are a few questions to consider:
You may need a custom shopping cart built or a canned solution may suffice depending on the outcome of these questions and the needs of your business.
Address validation is perhaps the most important feature of an online shopping cart which is why it’s worth discussing separately. No matter what you sell, you must determine how to capture and validate addresses so you can charge the correct amount of tax every time. Not to mention have a successful delivery to your customer!
Most states use destination-based sourcing for sales tax collection. This means that as the seller you will charge sales tax based on your customer’s ship-to address. Your tax calculation function must include the state rate and local jurisdiction rates such as at the city or county level.
Capturing addresses when you sell tangible goods seems intuitive – you need to know where to ship the purchased goods. But what about digital goods? You still need to identify the correct taxing jurisdiction on sales of digital goods. Tax should be based on user location. Tax calculation usually defaults to using the billing address if you don’t have the ability to ask for user location in the shopping cart. If you require the user to “register” and provide their location, then you will need to tax based on this address.
With exempt customers comes document and information management. If you anticipate that you’ll sell to a lot of exempt customers on your new online channel, you must decide if you will make those sales exempt on the order or make your customers pay sales tax on their orders and request a tax refund.
If you decide to make sales exempt on the order, you need to either require your customers to set up accounts with you to which you can apply their exemption certificate or require your customers to submit an exemption certificate with every order. Consider how much repeat business you typically have vs. one-time orders in this decision.
Orders with exemption certificates need to be validated. Will you put orders with exemption certificates on hold until you approve them? Or will you implement a system that auto-approves the certificates? Auto-approval runs the risk that an exemption certificate contains invalid or incorrect information and tax might not be collected on that order.
The type of customer-based exemptions you handle will help you make these decisions. If your customer exemptions are predominantly due to exempt entities (schools, churches, not for profits, government), the rules can be very specific and it might be harder to assume your customer really does qualify. However, if the exemptions are for resale, and the nature of what you sell is typically bought to be resold, it might be easier to have some automated approval processes.
When sales tax implications are considered before expanding your business to a new sales channel, you save a whole lot of headaches down the road. Sales tax pros should advocate to be involved in the early stages of planning.