Your customers expect you to get sales tax right
Consumers pay attention to sales tax. They often know how much sales tax they should be charged and check receipts to verify they’ve been taxed correctly. To keep their trust and business, you need to get sales tax right.
It’s hard, and it’s arguably getting harder. Whereas once retailers only had to collect and remit sales tax in states where they had a physical presence, businesses are increasingly required to comply with sales tax laws wherever they have customers.
Physical presence still creates a sales tax obligation in all states with a sales tax, but it’s no longer the only way a business can establish an obligation to collect and remit. On June 21, 2018, the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. freed states to impose a sales tax obligation on sellers with no presence in the state. Today, every state with a sales tax now also has an economic nexus law requiring certain remote sellers to register for and then collect and remit sales tax. You can find state-specific information in our state-by-state guide to economic nexus laws.
Economic nexus has greatly complicated sales tax compliance for retailers with customers in multiple states. Many businesses now need to keep track of changing sales tax laws, rates, regulations, and product taxability rules in as many as 45 states (plus the District of Columbia, Puerto Rico, and some localities in Alaska). They need to stop taxing products when a state provides an exemption, as Indiana and New York recently did for diapers, and Colorado and Iowa did for diapers and feminine hygiene products. They need to ensure they don’t tax products that qualify for a sales tax holiday. And much, much more.
Businesses also need to remain vigilant about physical presence, which remains the primary way many businesses establish an obligation to collect and remit sales tax (i.e., nexus). For example, storing inventory in a facility owned or operated by a third-party can create sales tax nexus for a marketplace seller. Employees working remotely in another state can also create nexus for a business.
Furthermore, sales tax compliance is becoming more complicated for many businesses because of changing expectations and new technologies. Thus, retailers offering a buy online, pickup in store (or buy online, return in store) option need to ensure they’re charging or refunding the proper sales tax rate on all transactions — the rate in effect at the location of the store or the consumer’s delivery address. The more variables involved, the more difficult it becomes to get sales tax right.
Digital transactions can also complicate sales tax compliance. As we all know, the COVID-19 pandemic led to an unprecedented shift from the physical to the digital; many of us still work online, socialize online, and even exercise online far more than we used to. Companies catering to the new reality often need to comply with the sales tax laws governing digital goods and services, which tend to be extremely complex.
No business wants to be found noncompliant, and most do their best to ensure they collect and remit sales tax as they should. But accidents and oversights happen, and when they do, some consumers can be unforgiving.
Suing over sales tax
Over the past decade, numerous businesses have been sued for erroneously charging customers pennies worth of sales tax.
An Illinois man sued one business for charging him 9 cents too much sales tax on a purchase of Cheetos and water. A New Jersey woman sued another company for charging her $2.61 worth of sales tax on products that should have been exempt. A pizza company was sued for illegally charging Florida and Illinois sales tax on delivery services, while a retail store was sued for incorrectly taxing buy one, get one free items in Pennsylvania. Some Californians sued a retailer for taxing coffee sold to go because, they said, the coffee should have been exempt. The list goes on.
More recently, a class action was brought against a certain “interactive fitness platform” for allegedly unlawfully charging sales tax to Massachusetts, New York, and Virginia customers on their membership subscriptions, “despite the tax-exempt status of such digital goods under state law.” The case is still making its way through the courts.
Of course, consumers don’t always seek legal action when they believe they’re overcharged. When a California man realized a car rental company was erroneously applying the wrong sales tax rate to rentals, he simply let the business (and local news outlets) know. After confirming an error had been made, the company fixed their sales tax system and announced their intention to refund customers the overcollected tax.
For the most part, sales tax errors stem from mistakes, not malevolence. Businesses generally don’t profit from overcollecting sales tax because they’re required to pass the sales tax on to the state. If anything, overcollecting or undercollecting sales tax creates a headache for businesses because it can lead to negative audit findings, negative press, and a negative experience for customers.
But it’s important to recognize that consumers are watching. They check to see if they’ve been overcharged and can be vocal about if they have been. With inflation and mounting household costs, people may now scrutinize receipts even more. Don’t give them cause to complain. Learn more about how automating sales tax can improve compliance.
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