We’re getting questions from sellers about their obligations to collect sales tax after the Supreme Court overturned Quill with its ruling in June. Unfortunately there are no simple, one-size-fits-all answers, frustrating sellers struggling to deal with the issue.
Here’s an example of a question a reader asked recently: “Can you please update us regarding sales tax laws for remote sellers? Which states have imposed a limit of number of sales and income and what those limits are?”
Lizzy Greenburg, Chief Marketing Officer of TaxJar.com, said her company has also been hearing from ecommerce businesses after the South Dakota v. Wayfair decision – everyone is wondering how to handle economic nexus, she said.
TaxJar created a free tool to help – but you must sign up for a free 30-day trial of TaxJar to use its Sales & Transactions Checker. It will tell sellers exactly where their business stands with regards to the current active economic nexus laws, Greenburg said.
Another reader sent an inquiry after receiving a notice from the Minnesota Department of Revenue. “What does it mean, besides a mess,” the seller asked. “I’m not domiciled in Minnesota though I used to be. Moved out of state. Now in Wisconsin and I file sales tax for sales in that state. I sell less than 100 orders under $10 a year in that state. but will eBay be a marketplace that has to collect on what I sell in Minnesota and/or other states? Will shipping charges be considered taxable? Yikes.”
TaxJar’s Greenburg said Minnesota is establishing an economic nexus threshold that goes into place on Oct 1st of this year, which it wrote about here.
But not so fast. States continue to draft laws and target individual sellers, and services like TaxJar can tell you your obligations those laws. However, there is still much uncertainty about economic nexus on which states are basing those laws. That’s because the Supreme Court didn’t rule in South Dakota’s favor – it remanded the case back to the lower court.
The issue has not been settled in the courts, leaving merchants in an untenable position. If you do extremely low volumes of sales, you may only have to worry about collecting sales tax in the state(s) where you operate. If you’re a retailer the size of Wayfair, Newegg, or Overstock, you’re probably getting good tax/legal advice and may be able to handle compliance without going bankrupt.
It’s those in the middle who face the biggest challenges.
After the Supreme Court overruled the physical nexus standard in June, eBay said the ruling could result in a “chaotic state-by-state patchwork of uncertainty and litigation that could take years to resolve and could find its way back” to the Supreme Court.
In the meantime, sellers are left struggling over what to do. Those determined to comply may end up drowning in an avalanche of red tape and may face other consequences. Those avoiding the issue could find themselves under attack by aggressive state enforcers looking for retroactive payments and penalties.
Sellers are also seeking help in figuring out how online marketplaces will handle sales tax. A seller from Michigan recently posted on the eBay discussion boards:
“Hello All- the state of MI will require online sellers to collect sales tax starting Oct 1, 2018. I already collect the MI sales tax. My question – How is eBay going to handle all different state sales taxes? Does anyone know?”
An eBay moderator responded:
“While specific tax situations would need to be discussed with a tax professional, I wanted to share some general resources for common questions on this topic.
“eBay’s Tax Policy can be found here, information on taxes and import charges (along with details on how to set up a Tax Table) can be found here and information specific to Value Added Tax (VAT) charges can be found here. If you have specific questions about invoice charges not addressed by these resources, you are welcome to contact Customer Service for further assistance!”
Many small sellers want marketplaces like eBay, Etsy, and Amazon to collect and remit the tax on their behalf. While marketplaces may be able to comply with Marketplace Facilitator laws, the structure of most state laws leaves them ill-equipped to collect on behalf of their sellers. As Etsy CEO Josh Silverman pointed out to Wall Street analysts last month, the tax rules are too complex, and Etsy sellers sell on multiple channels, so it has no way of knowing the *total* volume of sales each seller completes in a given jurisdiction, which is necessary to determine the seller’s obligation to collect.
It isn’t a simple matter of sellers ticking a checkbox to say, “yes, collect and remit sales tax on my behalf.” Sellers must first register with each state. (Be sure to pay attention to filing frequency requirements.) TaxJar offers a service for sellers who don’t wish to take the time to do it themselves at $100/state. But what small seller has the time or the money for either option?
If you’re not discouraged enough by the current state of affairs, take a look at a brief filed on April 4, 2018 by a group called the Online Merchants Guild (OMG) in the South Dakota v Wayfair case.
“Over the last year, the states have ramped up their enforcement efforts with harassing letters, emails and phone calls to remote small business online merchants that go as far as threatening incarceration for the failure to comply with sales tax demands.”
The OMG’s brief said California employed call center representatives with minimal tax training to “bombard” the landlines and cell phones of small business online merchants to pressure them into compliance.
The OMG also said states, through the Multistate Tax Commission (MTC), are raising the issue of income tax obligations on the part of sellers who have nexus in their states. Sellers who use fulfillment centers may be particularly vulnerable to claims of nexus for the purposes of determining income-tax filing requirements, as the accounting and consulting firm Baker Newman Noyes noted last year.
We asked TaxJar’s Greenburg if there were income-tax ramifications resulting from registering with state departments of revenue – she said her company doesn’t work with income-tax related issues, and recommended a directory of accountants found on the TaxJar website.
While it’s obvious US sellers are impacted, international sellers may also face repercussions. Charles Maniace, Director of Regulatory Analysis at Sovos, said these rules are real and binding for international sellers as well. “States are fully authorized to apply and collect tax on remote commerce. While there may be a slightly different constitutional standard as it applies to evaluating the validity of tax laws imposed on non-U.S. business entities, once a state lawfully imposes an economic nexus rule, retailers are subject to the rule if they meet the set threshold.”
He pointed out that the US state requirements are not much different from rules around VAT (Value Added Tax) that are cropping up all over the globe.
While many non-US sellers may feel that they are effectively immune from liability based exclusively on the fact that they are located overseas, they must consider their risk, Maniace said. It’s important for sellers to consider their reputation; whether they may plan to expand geographically; or if they have assets located in a state that could be subject to seizure based upon an adverse audit assessment for failure to collect tax.
Etsy Resources for Sellers on Collecting Sales Tax
Collecting State Sales Tax as an Etsy Shop Owner (link)
Help Center: Fees and Taxes (link)
Sales Tax for Washington, Pennsylvania, and Oklahoma (link)
Supreme Court Throws Out Longstanding Sales Tax Rule-Book (link)
With Quill Protection Gone, What Should Online Sellers Do? (link)
Sales Tax Victory Not Assured for All States (link)
New Hampshire to Protect Small Sellers from Sales Tax Burden (link)
State of Wayfair: Tax Group to Take Up Amazon-Type Marketplace (link)
Updated 9/10/18 to clarify that Baker Newman Noyes is a regional New England-based accounting and consulting firm, not a law firm as we initially wrote.