eCommerce Sales Tax Collection
By: Angel Harden, Sales Tax Analyst
Is Collecting Sales Tax a Competitive Disadvantage?
Too often, eCommerce sellers do not collect sales tax from customers because they are not familiar with their sales tax obligations or they are concerned that increasing their prices by charging sales tax will make them less competitive. Sales tax may have caused shopping cart abandonment in the past but in today’s post-Wayfair world, customers have become accustomed to seeing sales tax on internet purchases.
Unfortunately, many sellers decide to avoid their sales tax obligations until the states alert them to their compliance responsibilities. The truth is that this strategy typically ends up costing eCommerce sellers a lot more money.
Remote sellers who establish nexus in states but do not collect and remit sales tax are liable to the states for the uncollected sales tax, plus penalties and interest. Avoiding penalties and interest is usually not an option when states contact taxpayers for payment. Consequently, delaying sales tax remittance can frequently result in large tax bills with short due dates.
What’s Happening Now?
Three years after the Wayfair ruling, states are continuing to ramp up enforcement of economic nexus. Some of the most aggressive states include: California, Illinois, Missouri, Texas, Michigan, and Pennsylvania. They frequently send out nexus questionnaires looking for uncompliant taxpayers.
Another trend we have noticed is scrutiny around registration dates. Existing companies that are just now registering for sales tax are often contacted by state revenue departments to assess when economic nexus was established.
With the explosive growth of eCommerce and the states collective crackdown on economic nexus, every eCommerce seller needs to ensure that all sales tax obligations are met. The financial risks are far too great to ignore.
How to Manage Sales Tax Exposure
Voluntary Disclosure Agreement: Sellers who have not been contacted by a state but suspect sizeable sales tax liability, have the option to enter into a Voluntary Disclosure Agreement (“VDA”). By requesting a VDA, the amount of time that a state can look back for potential tax liability is limited and penalties are reduced. For example, Georgia limits the lookback period to 3 years and penalties are waived, but interest is still accrued.
Payment Plans: Some states offer the option of setting up a payment plan to spread out the financial impact on your business. Every state has different guidelines. Some states will break the balance into monthly payments for 6 to 12 months, or longer. For example, Michigan will break down payments into 48 months.
Sales Tax is not a Competitive Advantage
The moral of the story is to always use extreme caution when working to progress your business ahead of the rest via not charging sales tax because it can cost you more time and money in the long run.
Once nexus is established in a state, either by physical presence or by reaching economic nexus thresholds, file and pay sales tax to the state. If you have historical nexus, remediate the past due taxes first. Consult with sales tax professionals, such as Cherry Bekaert’s sales tax team, for guidance.
As your business grows, sales tax compliance becomes more complicated and time consuming. Understand your options such as automating compliance or outsourcing the process.
If you have questions regarding nexus or sales tax, contact your Cherry Bekaert advisor.