eBay only allows sellers to collect one sales tax rate per state, despite the fact that there are thousands of tax jurisdictions in the US. TaxJar launched a new tool designed to help eBay sellers determine the best number to use to collect sales tax via eBay.
TaxJar’s Ryan Thompson explained, “We ran millions of eBay transactions through our sales tax engine, and have come up with the average sales tax rates by state.” This gives the seller the best chance to collect the right amount of sales tax, he said. TaxJar’s system will then recalculate on the right jurisdictions when sellers file to make sure the sales tax collected is managed properly.
Thompson also answered some questions about the new feature and eBay sellers’ obligations when it comes to collecting sales tax for eBay transactions.
Can you explain the challenge for eBay sellers in collecting sales tax?
Ryan Thompson: There are over 12,000 different sales tax jurisdictions (rates) in the United States alone. In some states, the sales tax rate is calculated based on the seller’s address (known as origin based states), and others are based on the buyer’s address (destination based states).
Beyond that, some states provide sales tax exemptions for certain products, like New York does not charge state sales tax on clothing under $110 (but other city taxes may apply), and some states may or may not charge sales tax on shipping.
Unfortunately, eBay’s sales tax calculation engine for sellers only allows for a single sales tax rate to be used to calculate sales tax per state, and the seller is left to figure out what rate to use.
Why would eBay limit sellers to collecting only one sales tax rate per state?
Ryan Thompson: The current sales tax engine in eBay has been in place for over 15 years, and has fallen behind. Most carts and marketplaces now either provide ways for merchants to provide rates at zip code levels, which isn’t perfect but it more accurate, or provide real-time calculations based on more comprehensive sales tax engines like TaxJar’s SmartCalcs sales tax calculation engine.
Fifteen-plus years ago, the more accurate solutions simply didn’t exist, or didn’t have the scalability to support a platform with the transaction volume and complexity of eBay.
TaxJar states that the eBay system “isn’t ideal for sellers based in a destination-based sales tax state or sellers who have sales tax nexus in more than one state.” Can you explain this for sellers who don’t know what a “destination-based sales tax state” means?
Ryan Thompson: Destination based states require sales tax to be collected on the buyer’s location, not the seller’s location. California, for example, has hundreds of different sales tax rates and sellers are expected to collect according to those jurisdictions. There’s simply no way with eBay to modify the rate based on the seller location.
Origin based states, on the other hand, depend on the seller address and so can be much simpler. One of the more recent complications stems from sellers who are Fulfillment by Amazon (FBA), and may end up having a sales tax obligation to collect and report sales tax in 15-20 states because they have inventory (and therefore nexus) in multiple states. And, many of those states are destination based states, which adds to the complexity.
It sounds like using an average rate and then having TaxJar recalculate on the right jurisdictions when they file to make sure the sales tax collected is managed properly could end up costing merchants money? And in cases where they over collected from a buyer, do they have to refund that buyer?
Ryan Thompson: No method used to collect on eBay is going to be perfect, given the limitations of the platform. Our goal with creating the average rates for eBay sellers is to help merchants collect as close to the right amount as possible.
If a merchant under collects, the state will expect the business to make up the difference when they file; alternatively, an over-collection will require the business to either refund the overage, or pass it along to the state; most merchants simply do the latter.
Is there any solution for eBay sellers to be able to calculate sales tax owed at the time of transaction?
Ryan Thompson: Unfortunately, no. This solution would have to be implemented within eBay since they control the transaction. This is why it’s so important to reconcile the difference between what you’ve collected and what you actually owe the state. TaxJar does provide an “Actual vs. Expected” report that will show exactly how much the merchant collected, and a second report that recalculates each transaction on what should have been collected, so the merchant knows exactly where they stand.
While TaxJar charges a fee to sellers who use its system, it is providing the eBay average rates to everyone at no cost. The new feature is available on TaxJar.com, and you can learn more about the new feature on the TaxJar blog.