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States Keep Changing the Rules on Online Sales Tax

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States Keep Changing the Rules on Online Sales Tax

This article from Internet Retailer caught our eye, “Online sales tax laws are generating far more revenue than expected.” It shows the Herculean task of keeping up with the ever-changing requirements imposed by states on online sellers who ship to, but don’t operate in, their borders.

For example, California changed its threshold for when out-of-state merchants are required to collect and remit sales tax to $500,000 in California-based revenue in the previous 12 months, up from $100,000 – but Massachusetts is considering lowering its threshold from $500,000 to $100,000. The article takes a closer look at six of the states currently considering bills to change their sales-tax requirements.

Raising the threshold in California is welcome news for small sellers – along with passage of a marketplace facilitator law, which places the burden of collection on marketplaces like eBay instead of their individual sellers. (Interestingly, the article points out that Pennsylvania’s marketplace facilitator law is expected to generate about four times its initial estimate.)

But there’s a dark side to California’s requirements, as the LA Times points out. The newspaper’s editorial board published a piece calling for the state’s revenue department to reconsider its approach to back taxes, calling it a “gotcha” approach to tax collection.

“The California Department of Tax and Fee Administration has been seeking years of back taxes, with penalties and interest, from small out-of-state businesses that sold products through Amazon’s “Fulfilled by Amazon” program to shoppers in California. For example, a 12-person company in Michigan that sells comfort shoes and orthotic inserts online is facing a $200,000 bill for three years of back taxes, penalties and interest. A mom-and-pop kitchenware supplier is facing a bill for more than $100,000.”

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These are not taxes that the retailer owed – California residents were supposed to pay the state’s sales tax. Sadly, Amazon, which benefited from sellers’ participation in Fulfillment By Amazon, has been unable or unwilling to help those sellers, some of whom have already bitten the bullet and paid enormous sums to the state.

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Ina Steiner
Ina Steiner
Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to ina@ecommercebytes.com.

4 thoughts on “States Keep Changing the Rules on Online Sales Tax”

  1. Don’t take PA’s claims at face value. These fools couldn’t do a budget estimate if their lives depended on it. 2002 they stopped contributing to the pension fund, thinking the market would go up forever. 2007 or so they cut corporate taxes expecting a windfall and created a deficit so bad they tried to raise sales tax for the following decade. Ran an amnesty program twice and both times brought in less than the program cost. Consolidating (offshoring) IT services, massive costs to save virtual pennies. They have no idea how any of this will work out but it never stops them from opening their noise holes.

  2. California also removed the 200-transaction threshold. If 200 transactions is reasonable for South Dakota, it should have been 9,000 transactions in California with 45 times the population of South Dakota. If other populous states retain the 200-transaction threshold, they may ensnare small sellers with revenue less than the South Dakota Wayfair revenue threshold.

    Meanwhile, eBay continues to expand market facilitator sales tax collection, but with minimal support to sellers who may require information about taxes collected on their behalf. So far, eBay has ignored requests for reporting going back more than 90 days. The Tax Collected by eBay column didn’t appear in the difficult to access Orders report until mid-April, too late for Washington State based sellers who must report revenue and amounts collected by eBay required in connection to Business and Occupation (B&O) tax calculation.

  3. One thing states need to keep in mind is that $100K is barely comfortable for a household of four when you consider all the taxes (whether personal, business and/or self-employed) and business expenses that are deducted from that. Of course, that’s just in one state, but what if the bulk of a seller’s sales come from that state?

    It would seem that each state will have to have different thresholds based on sales tax revenue limits. For example, California has a far higher population and far more in-state businesses to generate sales tax locally than a state like Pennsylvania. So, it would be appropriate for California to have a higher threshold than Pennsylvania.

    There should be an absolute minimum that a state can go, though, and I believe $100K is too low. States must consider the percentage of a seller’s total sales that were generated within their state. For example, if a seller generated 75% of their total sales within that state, then a threshold of $100K wouldn’t leave much for a single- or even double-income family after everybody else has taken their “share”.

    There are just so many factors to consider and each state requiring the tax has different needs. That’s a lot for one state to consider and they expect a sole proprietor to keep up with multiple states? Maybe they should allow us to deduct the time and expense of figuring it all up, doing all the paperwork and making all the payments.

    If they’re going to make us do their work for them, then they need to pay us something in return. After all, if they had been educating their population and enforcing their use tax laws to begin with, then we wouldn’t even be having this conversation. It’s a lot easier for them to put it on our shoulders.

    Since this topic first became hot however many years ago, I have always said that internet sales tax should be handled on the federal level since it involves interstate commerce. When you consider all the different laws, thresholds, and what-not that each state is currently coming up with, not to mention all the changes they keep making, there’s no way a sole proprietor could keep up with all of that.

    As a sole proprietor who also assists her elderly folks with their bookkeeping and other things around the house, I’m a single-income person who wears all the hats in her business. I would have to hire someone to handle it all and that digs into my business’s and my own income — on top of the sales tax, income tax, and all the other costs a business has to cover.

    When the first states started enacting their internet sales tax laws, I just knew it was going to get crazy. They all really need to get over themselves and hand the reigns over to a single entity, whether it be federal or another designated by states. At the moment, they’re all just making fools of themselves by showing how little thought they’ve really put into this — all while we little sellers sweat it out.

    Another thing to consider is just how many sellers are looking to move away from these marketplace sites that are currently handling the sales tax for sellers. We’re tired of being taken advantage of, working our tails off as we watch all these hands dipping into our pies.

    As it is, there are so many who don’t have the skills required to set up a standalone site, but even those who do are shuddering at the mere thought of having to handle sales tax for multiple states on their own. That basically means we’re fearing our own success and that’s just sad.

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