With the rush of holidays sales behind them, many retailers are celebrating starting the year in the black with Black Friday and Christmas profits in the coffers. Online sellers, in particular, did very well during the 2019 holiday season, with Cyber Monday sales alone hitting over $9.4 billion. However, all of that business may have unintended tax ramifications for businesses who sell products on the web, as it may create new and ongoing tax collection requirements for retailers.
What Are the New Tax Collection Requirements?
As we detailed in our article “California is Retroactively Seeking Tax for Online Sales,” states may charge sales tax for online purchases even if the seller has no physical presence in the state in question. This ruling, set as a result of the South Dakota vs. Wayfair case in 2018, has led to high-taxes states such as California seeking back payments for online sales. While businesses have always had to collect and remit sales tax for the state in which they reside, this additional tax obligation poses a threat to the bottom line of online retailers nationwide if the collection is not done properly.
Who Do These Requirements Affect?
So how do holiday sales affect tax reporting requirements for online sellers? Since remote sellers have to collect sales tax from out-of-state buyers once they reach the economic nexus threshold, a surge in online sales driven during the holiday season may mean the difference between being exempt and being liable.
In big business states such as California and New York, the threshold is $500,000 in annual sales. In Alabama and Mississippi, however, the threshold is $250,000, and in smaller states it may be as low as $100,000 and/or 200 total transactions. Laws on what types of sales count toward the threshold (physical vs. digital) vary from state to state. Since many states require business owners to register as soon as the nexus is hit, it is important to be aware of the laws effective in your area. According to Accounting Web, details for each state are available in the state-by-state guide to marketplace facilitator laws and state-by-state registration requirements for marketplace sellers.
The burden of collecting sales tax for multiple states lasts for at least one year. While dropping below the economic nexus can sometimes mean the businesses can unregister and cease collecting, different states have varying rules about how soon this can be done. Therefore, the long-term effects of crossing the threshold and becoming liable for out-of-state taxes are significant. Luckily, systems put in place for automated sales tax collection, remittance, and filing can ease this burden. Businesses that operate in a state that is part of the Streamlined Sales and Use Tax Agreement (STT) can contract with a Certified Service Provider to perform tax collection duties. In you reside in a state that is not part of the STT, similar programs may soon be placed into effect in your area.
Be sure to review what occurred in your business in 2019 to make sure you are not subject to reporting to states besides the one in which you are physically located.