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Accounting, Management & Legal
Ecommerce Companies: You Are Responsible for Sales Taxes
Surge in online sales results in billions of unpaid taxes
By: Jonathan Barsade
Comments: 13
One of the most common misconceptions for ecommerce retailers is that sales taxes are not due on Internet transactions. Nothing could be further from the truth. Ecommerce retailers, in fact, are responsible for sales taxes and are subject to penalties and fines for the failure to pay them.
The misconception originates from a 1992 Supreme Court ruling known as the Quill case. The Quill case was decided in the pre-Internet arena, but it has subsequently become applied to online transactions, too. In Quill, the Supreme Court stated that it will not enforce sales tax laws because, in part, of the undue burden that retailers face when dealing with potentially thousands of sales tax jurisdictions. That is, the Court stated that tax systems are so complex, and there are so many jurisdictions, it would be an undue burden to require retailers to be familiar with and comply with each and every jurisdiction. For ecommerce retailers, this is certainly the case since virtually all of them sell to nationwide customers who live in various cities, counties and states, all of which levy sales taxes on retail transactions. Each of these jurisdictions could have different sets of rules. Requiring retailers to know and be familiar with each set of these is just not feasible. Nonetheless, in Quill, the Court was very explicit to say that sales taxes still apply to these retail sales even though it chose not to enforce the collection of them.
Because of this lack of enforcement, retailers have traditionally failed to calculate, collect and pay sales taxes owing on Internet transactions. Many confused this lack of collection with the Tax Moratorium Act that Congress enacted in 1998, thinking that Act applied to the collection of all taxes on Internet transactions. In fact, the Moratorium Act has nothing to do with sales taxes. It merely stated that no new taxes, such as a hypothetical "Internet access tax” or “bit rate tax,” can be created on Internet transactions. It has no effect upon existing taxes such as sales taxes. The states, meanwhile, did not enforce the collection of their own sales taxes for much more practical reasons: There simply was not much sales activity on the Internet and the foregone sales tax dollars were therefore relatively small.
In the last two years, both of these variables have dramatically changed. There is now much sales activity on the Internet. And, following from that, studies show that there will be nearly $20 billion of unpaid sales taxes in 2005 from these online transactions. (This $20 billion is expected to double within a few short years.) Since many state governments are running fiscal deficits, these governments are looking for new sources of revenue and the $20 billion of unpaid sales taxes is looming large.
To address these circumstances and respond to the Quill ruling, a group of states jointly drafted and signed the Streamlined Sales Tax Project (“SSTP”). Under the SSTP, emphasis is placed upon achieving rule uniformity and compliance simplicity. The states hope that with this process in place, Congress will pass legislation to expand the jurisdiction capabilities of the Courts who, the states hope, will enforce the collection of the various Internet-related sales taxes. The SSTP became effective on October 1, 2005, when a dozen states formally ratified the rules required under the SSTP, with another six states being in partial compliance. Nearly all other states have signed the SSTP contract, but it will take them some time until they fully implement the rules.
The agencies behind the SSTP took the concept of ‘simplification’ to the next logical step by appointing private firms to develop technology to automate the process of calculating sales taxes, filing sales tax returns and paying the tax proceeds on behalf of the retailer. These private firms are called Certified Service Providers, or CSPs. To date, seven CSP candidates have passed the initial phase, but of them, the SSTP has stated that only two, Exactor and Taxware, have systems in place that have been tested and qualify for certification in the near future. Other companies are expected to receive this certification in time.
But compliance with current sales tax laws does not rest on the SSTP and the hiring of a CSP. Many states are becoming aggressive in enforcing existing sales tax laws and not waiting for SSTP to come into effect. In fact, large, online retailers such as Barnes & Noble, Borders and Office Depot found this out the hard way via back taxes, interest and fines imposed upon them due to their failure to pay sales taxes. Thousands of consumers nationwide were recently invoiced for taxes they did not pay when purchasing cigarettes online. Under Internet Sales Tax Fairness rules, companies are finding that they need to register and pay sales taxes if they want to sell to state governments. Small companies, with revenue in the low millions, are being hit with audits and penalties of tens of thousands of dollars for failure to collect taxes.
The bottom line is that sales tax compliance is a real issue, independent of the SSTP. Retailers need to be aware of this. Retailers cannot beg forgiveness after the fact – they will still owe penalties and fines for failure to comply on a timely basis. Fortunately, CSP-like technology providers can offer solutions that help you address this issue by providing a simple, reliable and accurate solution that operates in a completely automated manner, regardless of which state you are located in or which state you are selling to.
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Published on Monday, January 15, 2007
Comments:
This is a great article into the history of sales tax related to e-commerce, but fails to explain how this affects real world merchants now. I own several e-commerce businesses and have always only collected sales tax for my own state and local government. What does this mean for small e-commerce store owners? Which states should we collect sales tax for and how should we pay it? Who can we contact for more information about the laws and procedures in each state?
Posted by: Brandon Eley
Tuesday, January 16, 2007
For information about how it would directly impact you specifically, I'd suggest contacting your state's equivalent of a "Department of Revenue," or whatever other entity might handle retail sales tax for your state. Frequently, it's a Department of Revenue. However, you may also have people at your city or county level who handle traditional retail sales tax questions/collections that can be of direct support.
Finally, the entity that was referenced in the story would be a resource for information at Streamlinedsalestax.org.
Posted by: Mitch Bettis
Tuesday, January 16, 2007
We work hard to cover this topic as it develops. Clearly it is a complicated subject with many loose ends still needing to be tied up. Please take a look at the "Related Articles" in the right column of this page for more articles about ecommerce sales taxes which may help answer (or raise more) questions.
Posted by: Brian Getting
Tuesday, January 16, 2007
What about sales made through affiliate programs. I am about to launch a website whereby I link to my an eBay store (another although separate tax issue) but also link to companies that have their shopping cart for new items. I then receive a commision on each sale. I'm sure they would collect and pay the sales tax, I need to double-check with them, but can I be held responsible as well for those sales taxes?
Thanks for the timely article. You've brought up some interesting points that directly apply to me.
Posted by: Matt Spencer
Tuesday, January 16, 2007
I am having a difficult time understanding this law and its enforcement.
My thought is this... If they want us to charge a state sales tax for every transaction, then the sales tax rate should be for our state of residence. After all, if I reside in one state and drive into another, I dont pay my home state tax amount. I believe we are taking the information superhighway to an ecommerce store.
Of course, the above solution then gives advantages to those ecommerce business owners living in states with no sales tax.
This leads to Wally's previous post. The only fair way to do it is VAT.
Posted by: James Allen
Tuesday, January 16, 2007
This article raised more questions than it answered. Im under the impression that as an ecommerce business owner, if I make a sale to someone in my own state, then I am responsible for collecting and paying retail sales tax. If I make a sale to someone in a different state, I am not to collect nor pay sales tax.
Is this still true? The article doesnt say either way... "Requiring retailers to know and be familiar with each set of these is just not feasible. Nonetheless, in Quill, the Court was very explicit to say that sales taxes still apply to these retail sales even though it chose not to enforce the collection of them." So I'm at risk of being responsible for paying all sales tax on all sales (at my home state's rate) on every sale I make no matter where the customer resides?
Posted by: Don
Tuesday, January 16, 2007
Great, I can barely figure out my own state’s convoluted sales tax scheme. And politicians really expect me to figure out how to collect sales tax for every jurisdiction in the US? Amazing.
Posted by: John Dugan
Tuesday, January 16, 2007
If the states want money from Their Citizens- I'll be glad to let them know who paid what for what whenever. But- Do NOT expect us to collect sales tax for other states until the whole system IS streamlined.
Heck- even in my state- with all of these different rates- we just charge the highest in the state (except our county)- and remit all that we collect.
It's a big mess that is ignored. Thats why we should just go VAT like the rest of the civilized world. All's fair and those with the most money to spend pay the fair share without the loopholes that let them weasel out of paying their taxes.
Posted by: wally
Tuesday, January 16, 2007
Here is a link to articles on our site that are related to the Streamlined Sales Tax Project. Of particular interest is Overstock.com CEO Patrick Byrne's ideas on the subject:
Articles related to the Streamlined Sales Tax Project
Hopefully these will help everyone out.
Posted by: Brian Getting
Tuesday, January 16, 2007
(see “Technology Solution Providers” to the right),
Where?
Posted by: Mark Johnson
Friday, January 26, 2007
It's one of the additional stories, and it's listed under "Related Articles" to the right of the story above and entitled "Hiring a Sales Tax Technology Provider."
Posted by: Mitch Bettis
Saturday, January 27, 2007
The article has one mistake that I would like to point out. There are actually 3 Certified Service Providers of the SSTP. They are Taxware, Exactor, and Avalara. Avalara has been a CSP since May of 2006.
Posted by: Nate Odell
Wednesday, August 15, 2007
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I thought I read there would be tiers, based upon annual sales, that required different size companies to comply at different levels. Anybody have that information?
Posted by: Jim
Tuesday, January 16, 2007