How Has U.S. Sales Tax Evolved In E-Commerce Landscape And What To Expect In The Coming Years?
With online sales flourishing, state and local governments are targeting online sellers and are eager to make tax collections from this potential revenue stream. Hence, online sellers are expected to shell out substantially more for state taxation in E-Commerce with the increasing number of transactions.
Retailers need to understand that paying sales tax online and its analysis may be more complicated for online stores when compared to brick-and-mortar stores. Considering the magnitude of digital revenue and multiple states and jurisdictions, it becomes increasingly important for businesses to understand the relevant obligations while taxing E-Commerce sales.
Considering the constantly changing tax rules, forms, and tax rates along with the numerous jurisdictions, many e-commerce companies are currently overburdened.
This guide will help you understand more about the Online Sales Tax and the marketplace and how it affects your sales tax collection and payment responsibilities.
What is a Marketplace Facilitator
The year 2021 was a marquee period for marketplace facilitator laws, with Florida and Missouri incorporating them in addition to the economic nexus regulations. As of date, all the U.S. states which attract sales tax have adopted marketplace facilitator laws. Thus, it is crucial to understand what a Marketplace Facilitator is.
What Sellers Need to Know?
A marketplace facilitator is an enterprise that provides a platform for third-party businesses to list their products and services through a physical or electronic interface. As the name suggests, it involves the facilitating of retail sales through a marketplace operated by an entity that meets specific statutory requirements.
In general, it renders services in the following categories:
- Provides infrastructure to connect connects customers and service providers in the process of order placement and fulfillment
- Provides payment processing and receipt collection services
- Provides shipping assistance at their discretion
Commonplace examples of marketplace facilitators are Amazon, eBay, Walmart, and Etsy.
Interestingly, Shopify is not considered a marketplace facilitator. Why is that so? While Shopify collects sales tax, its functionality is limited, and the responsibility of managing its collections and remittances remains with the vendors. Shopify, thus, remains more of a marketplace aggregator.
If you are utilizing a marketplace facilitator for your products, you are covered for sales tax purposes in most cases. This is because most states require marketplace facilitators to collect sales tax on your behalf. However, there could be some tax exposure if the entity makes sales through both your website and a marketplace facilitator.
Why Does it Matter?
Marketplace facilitator laws originated from the concept that a state could collect a significant portion of the requisite sales tax from one enterprise rather than hundreds of smaller companies. Accordingly, various states have enacted legislation that necessitated marketplace facilitators to undertake sales tax collection and remittance on behalf of their third-party retailers' activities.
The benefit of having marketplace facilitator laws? States benefit as they collect additional sales tax from a limited number of enterprises, resulting in simpler compliance. For sellers, the responsibility of sales tax payment for certain transactions shifts to the facilitator.
However, the law is not as simple or straightforward as it was intended to be. Considering nationwide and international transactions, the definition of a marketplace facilitator varies from state to state. Thus, uniformity is the last thing you will encounter in marketplace tax regulations.
In fact, the definition of a marketplace facilitator varies almost as much as its sales tax laws. Further, the marketplace facilitator laws of many states remove specific businesses or industries from their explanations. Advertising services and payment processors are common items that are often omitted under these laws.
Thus, in order to be updated with sales tax laws and regulations, it is best to consult with a sales tax expert or opt for tax automation software.
Brief About U.S. Sales Tax In The E-Commerce Landscape
Click-through Nexus Laws
Businesses are still coming to terms with the economic nexus; however, the nuances of physical and digital presence are often still incomprehensible.
In order to increase sales tax collections many States have broadened their description of physical presence to include affiliate or click-through nexus. Suppose an out-of-state business such as an Indian-based seller has an association with any of the in-state marketing affiliates due to promotional ads/links, then it is referred to as click-through nexus.
We all know that Indian products are in heavy demand in the U.S. More so, with 3 million Indians living in the U.S. who yearn for homegrown grown products. In fact, as per Deepak Agarwal (Founder of Desiclik), the in-demand products sold in the U.S. include Indian ethnic wear, ready-to-eat meals, handicrafts, woodwork, grocery, oils, jewelry, spices, etc.
Online retailers entering into similar arrangements with Indian companies do so in exchange for a commission. Accordingly, the Indian company and the online retailer have a click-through nexus, and the responsibility for collecting and remitting sales tax on this commission needs to be assessed.
Ideally, companies need to be up to date with the legislation of all fifty states and U.S. territories. Any non-compliance with sales tax regulations may be subject to fines and penalties. Today, click-through laws are in effect in 20 states such as New York, Kansas, Illinois, Nevada, and so forth.
Introduction Of India’s Digital Tax
From an Indian perspective, the digital tax or equalization levy was put in place in April 2020 for overseas e-commerce retailers.
India introduced this to bring about fair competition for Indian taxpaying businesses. This law stipulates that a foreign e-commerce company will need to bifurcate the inventory of resident and non-resident sellers on their platforms to bring clarity to the applicability and levy of taxes. Further, this would apply to U.S. online retailers with annual revenues of more than USD 275,404 (approx. INR 20 million).
The U.S. trade body is currently investigating this legislation change and is considering imposing punitive tariffs on India. For India, that would mean an additional tax of 25% on around 40 Indian products such as basmati rice, bamboo products, wood furniture, gold and silver items, etc.
When it comes to the taxability of products, most tangible goods such as furniture or household goods and appliances are taxable. However, companies need to be aware of the exemptions available on certain products in some states.
Hence, as each state has different regulations for the taxability of products, you will need to consistently keep a check on the rates and exemptions of each state. Furthermore, the constant changes in regulations only mean that companies need to be aware of whether they are incorrectly charging taxes on exempted products or losing out on revenue of taxable products.
Further, Indian companies need to note that if a sales tax nexus is established in a particular U.S. state, you will need to request a sales tax permit in that state for sales tax collection from buyers present in that state.
What To Keep In Mind: 2022 And Beyond
States Will Continue to Pursue Online Sellers Through Marketplace Providers
While the current legislation ensures that online sellers register in a particular state for tax collection and remittance purposes, many states go a step further. Some revenue departments request information lists from online retailers, such as information on marketplace sellers who have inventory in the state.
Currently Walmart has taken a step to include Indian sellers as a way to expand their product assortment and attract international sellers.
Further, sellers who utilize marketplaces will have to pay hefty commissions for each sale produced. This is where solutions like Avalara can help navigate the complex sea of taxes and help businesses reap the most benefits.
This nationwide phenomenon is not expected to wane but is anticipated to follow the same trend in the coming years. Hence, companies need to be more equipped to understand the tax implications in this case.
Complications of BOPIS and BNPL Tax Rules
BOPIS (Buy Online, Pick-up In-Store) has evolved as the shopper's choice in the pandemic period thanks to the ease of shopping locally without having to enter a physical store. However, while this option is a consumer-friendly experience, the companies, on the other hand, are burdened by tax compliance.
The BNPL (Buy Now, Pay Later) option is an approach that has caused some apprehension. Here, even though the lump sum of the sales tax amounts to the same, payment made upfront often hinders customer experience.
While customers benefit from the flexibility of multiple installments, the question that arises is - When to tax?
Let us look at an example:
Should a customer purchase a product online for USD 240 and select the payment option as quarterly installments (of USD 60 each), what would the sales tax implication be?
Interestingly, the e-commerce tax calculations could be either:
- At the time of procurement on the entire USD 240, or
- At each installment, where the tax percentage is predetermined
Hence, the taxability would depend on the state in which the sales are made.
Need To Monitor Sales Tax In All States
With more than 13,000 sales tax jurisdictions and around 45 states having statewide sales tax in the U.S., understanding the tax obligations becomes burdensome. The complexity becomes multi-fold when businesses sell different product types to multiple jurisdictions, and you need to arrive at an appropriate rate for each transaction. Furthermore, each state or local jurisdiction can change the sales tax rate and taxability rule for products and services at their discretion.
Hence, companies that set sales tax rates in their POS (point-of-sale) systems need to monitor them on a continuous basis. Since the application of an erroneous rate or code to a transaction can lead to system snags or check-out errors, sales tax laws need to be reviewed periodically.
States often come out with new exemptions that benefit specific industries or taxpayers. While some states may document and post announcements for rate and rule changes, not all rate change notices are received in time. Did you know that diapers and feminine hygiene products are likely to become exempt from July 1, 2022, in Louisiana?
Thus, be sure to undertake periodic sales tax check-ups and double-check your sales tax obligations as a routine.
How Can Avalara Help?
Organizations constantly juggle between the toils of the business environment and the complexities of taxing E-Commerce sales. Choosing between efficiency and expediency often becomes their reality. Interestingly, many ill-informed companies are unaware of the multi-jurisdictional sales tax obligations and tend to neglect them.
Fulfilling sales tax ecommerce obligations in the U.S. for India-based businesses on a regular basis would need an army of accountants. This can get confusing and prevent them from flourishing due to the array of taxes involved based on each nexus. Thus, it would be wise if organizations did away with outdated manual approaches or tried to assume the responsibility of sales tax themselves. However, the optimal solution would be to opt for an external party with specialized expertise and technology. This will help India-based companies like Zomato to easily file for sales tax returns without complications.
Just as companies have opted to automate their payroll management, they should also consider going in for tax automation software for their business processes. Providing affordable and efficient solutions to deal with the unique challenges of online sales tax, AvaTax takes the pressure out of sales tax complexities.