An Accountant’s Guide to Online Sales Tax – Part 1
Just as selling through online retailers has drastically changed how your clients do business, it has also changed how accountants think about sales tax.
For years, consumers shopped online, shielded from sales tax, but with increased online spending on Amazon, Etsy and other online marketplaces, local tax jurisdictions have taken note of the millions of dollars in lost sales tax revenue – and they’re working to obtain it.
These are fast-paced and changing times for Amazon and other online retailers and also for individual states. We routinely hear how states are trying to increase tax revenues from remote sales. For example, as of January 1, 2018 Amazon is collecting and remitting Washington state sales tax on third-party marketplace sales.
Amazon collects and remits sales tax on its own sales in all states with a sales tax, but only collects and remits on its third-party sales in a handful of states. As of April 1, 2018, Amazon is collecting sales tax on behalf of third-party sellers in Pennsylvania and Puerto Rico.
And, in certain states, (e.g. Massachusetts and Rhode Island), Amazon has agreed to hand over the seller’s information to the state Department of Revenue. Meanwhile, a number of states are implementing notice and reporting requirements for non-collecting sellers to encourage them to collect and make it easier to enforce use tax compliance.
Sales Tax Primer for Your Amazon Seller Clients
With continued ongoing growth and need to find efficiencies, Amazon has set down roots in numerous states by opening warehouses to hold product inventory. Having this sort of physical presence in a state exposes Amazon to state nexus – a critical criteria for a state to require sales tax collection, filing, and remittance.
One of the key concepts of determining sales tax burden is physical presence. Nexus is defined as a “connection to or presence within a state” and it’s the first thing you want to consider when looking at how your ecommerce client will manage sales tax exposure.
For most businesses, this starts with the client’s home state. A client will have nexus wherever their business is headquartered (assuming the home state has a sales tax), meaning they must collect and report sales tax on the taxable goods sold through Amazon and any other ecommerce platform as well as brick and mortar stores.
However, many businesses operate beyond the borders of their home state, whether they have a remote office, a traveling sales person, or product stored in a state warehouse location in other states. Many states are broadening their definition of nexus to capture more sales tax revenue from remote sellers and working to obtain their rightful share of tax revenue.
Once you have determined whether your client has nexus in a state, the next step is to get them registered with the state Department of Revenue to collect sales tax. This can be done online by visiting the appropriate state DOR website and completing the registration process.
Once the application has been processed, your client will receive a sales tax permit allowing them to collect sales tax from their online customers at a rate determined by the local taxing authority.
Collecting Sales Tax
Amazon collects and remits sales tax on its own sales in all states that have a sales tax. However, Amazon is currently only required to collect and remit on behalf of third-party sellers in Washington and Pennsylvania and Puerto Rico. In most other states, it only collects tax on behalf of sellers that ask it to, and then they pay Amazon for that service.
Your clients are required to collect and remit sales tax on taxable transactions wherever they have nexus. They’re required to provide documents and records that list the sales tax amount separately so their customers can easily see the amount of their sales tax. For brick and mortar sellers, this typically isn’t a problem as sales receipts and checkout systems are set up to print the amounts separately.
For online sellers, however, the “shopping cart” page needs to mimic this presentation, listing the sales tax calculation separate from the cost of the purchased item.
Sales tax collected belongs to the appropriate taxing authority (e.g. the state, city, county, or special district). It is important to remember when a business collects sales tax it is not collecting sales revenue and the funds should never be treated as such. Businesses serve only as trustee or custodian of these funds until those taxes are remitted to the state.
Sourcing the Sales: Origin vs. Destination States
Determining which tax rates to apply to a sale depends on “sourcing.” Sourcing is complicated, as the sourcing rules work differently if your client is a remote seller, that is if they are based in one state and selling into another state where they have nexus (an obligation to collect sales tax).
A very basic description: States have either “origin based” or “destination based” sourcing. Some states base sales tax on the origin of the sale — where the seller is located; others base sales tax on the destination — the location where the buyer takes possession of the item sold. As a seller, it’s important for your client to know whether you are located in (and selling into) an origin-sourced state or a destination-sourced state.
Filing Sales Tax Returns
Your client will be assigned a sales tax filing schedule based on how much sales tax they collect. Every state asks a new seller how much they expect to have in sales and use that number to determine a filing schedule. If the seller has no idea how much they will have in sales the state may elect to put that seller on an annual filing schedule.
However, with more revenue comes more collected sales tax. As your client’s business grows, you’ll find the filing schedule accelerates from annually to quarterly and eventually monthly. And,
State taxing authorities are always anxious to get their rightful tax dollars and, as mentioned previously, states are stepping in to more aggressively collect from online sellers. In addition to knowing the correct rate to charge, it is important that your clients know each state’s about which products and services are taxable or exempt, who pays taxes and when sales and use taxes are filed.
In Part 2 of this guide, we will review how Amazon collects sales tax from its marketplace sellers and some of the complications that your ecommerce clients may encounter.