Critical question for online sellers: Got state sales tax? (The Devil is in the details)
The days of selling goods and services to customers in another state and not having to worry about charging sales tax are quickly coming to an end – and companies that fail to collect the required tax could face severe penalties.
At least 20 other states are requiring companies to collect sales from online purchases depending on how much in annual sales they do. Pennsylvania modified its law in Act 13 of 2019 (House Bill No. 262). In that act, Pennsylvania now requires retailers to collect sales tax if they hit $100,000 in sales to persons in the state.
Spurring the online sales tax collection drive by states is the U.S. Supreme Court’s Wayfair v. South Dakota decision. It overturned the high court’s previous finding (Quill Corp. v. North Dakota) that a taxable presence or “nexus” was created by a physical presence in a state. If a business had such a physical presence, the company would be required to collect and remit sales tax.
The Wayfair case established an “economic presence” standard for the purpose of determining nexus. South Dakota’s law defines an economic presence as $100,000 in sales or 200 or more transactions per year to persons domiciled within South Dakota.
The following tips can help your company stay on the right side of the sales tax collection laws.
Know your ‘nexus’
As states jump on the Wayfair bandwagon, each state defines what “economic presence” is for sales or the number of transactions. Many of the states are selecting $100,000 in sales as a safe choice because that is threshold in the Wayfair decision and that level of sales keeps the administrative burden of the state and seller reasonable. While many states are sending letters to companies letting them know they need to register and pay sales tax, it’s incumbent on the seller to see if they need to comply.
Remember, nexus varies from state to state, as does the deadline to start complying. That means the time is now to make sure you comply with all the states in which your company has online sales over the state’s threshold.
Under Pennsylvania’s “Marketplace Sales Act,’’ sellers had until July 1 to register and, if they meet the threshold in the preceding twelve-month base period, start collecting and remitting sales tax.
To determine your company’s nexus, calculate the revenue from the goods and services before considering any sales tax exemptions that may apply. Using Pennsylvania again as an example, its guidelines state that, “sales are the gross amount on all channels to include taxable and nontaxable sales.’’ You may need some help from your CPA as the definitions of “sales” and “persons” may vary by state. As the saying goes, “the devil is in the details.”
That’s not to say that companies are required to collect sales tax on items ordinarily exempt from the levy, such as most kinds of clothing in Pennsylvania. Just as you need to check nexus thresholds state-by-state, the same scrutiny applies to what items are subject to sales tax.
Online marketplaces and click-through nexus
Many states also have laws in place to capture sales tax from third-party vendors selling through a marketplace, like Amazon, and even on other retailer’s websites.
In Pennsylvania and other states, Amazon has said it will collect applicable sales tax on behalf of its third-party vendors. However, if your company is selling on a marketplace that doesn’t collect sales tax, it is your responsibility to keep track of your transactions, collect PA sales tax, and remit the tax to the commonwealth.
“Click-through nexus’’ describes another company’s site that also highlights your products and that you pay every time they send a sale your way. A growing number of states require the collection of sales tax on such transactions if the affiliate is within their border.
It’s a sure bet that states are not going to let this source of revenue go untapped, especially since brick and mortar stores have long complained they are at a competitive disadvantage if online retailers avoid collecting sales tax. Because the Supreme Court’s Wayfair decision didn’t set any guidelines on the thresholds states are allowed to use in determining sales tax liability, we’ll continue to see requirements vary.
Any company with online sales is well advised to look immediately at the states in which they are selling, determine nexus for that state and, if necessary, develop a plan for compliance. Companies that don’t collect required sales tax could be forced to pay the tax themselves, along with interest and penalties.
PA residents who purchase goods online are required to pay “use” tax if the marketplace facilitator or seller fails to collect sales tax on the sale. The PA Use Tax applies if the item or service purchased is subject to tax in PA. PA Use Tax is the same 6 percent (higher in certain jurisdictions) as the PA Sales Tax.
Now is the time to consult with your financial advisor and make sure your company isn’t out of compliance. If you are, voluntary disclosure to a state’s taxing authority could reduce or eliminate interest and penalties, especially if an amnesty program is available.
Edward R. Jenkins, CPA, CGMA is a Tax Consultant with Boyer & Ritter LLC Certified Public Accountants and Consultants