10 Ecommerce Sellers' Common Misconceptions About Sales Tax
- Feb 25, 2016 | Katherine Gustafson
With the rapid change in and continued confusion about sales tax laws that apply to online business, it's no wonder that misunderstandings abound. Here are a few of the most common misconceptions that can undermine ecommerce sellers' best intentions to run their businesses well.
1. Online sales are all tax-free
This may have been true in the early days of Internet selling, but today it is completely false, and getting more so all the time. What I mean by "getting more so all the time" is that states are continuously tightening their nexus rules and trying to find other ways to capture revenue from potential taxes on online sales.
2. I only need to charge tax to buyers in my home state
You definitely need to charge tax to buyers in my home state (except if you live in a state with no sales tax), but your obligations don't end there. You also have to add tax when selling to buyers in states where you have nexus.
Nexus means a physical presence in or connection to a state, and the rules for what that means vary by state. You definitely have nexus in the state where your business is based, and you likely have nexus in any state where you have an office, a warehouse, or an employee. Check the laws in any state in which you suspect you could have nexus.
3. All online sales are taxed based on origin-based/destination-based tax rules
As far as misunderstandings go, this one is a doozy. Many people have no idea what the origin-based and destination-based tax rules are all about, and therefore lump the concept mentally in with nexus, another issue they may not fully comprehend. But these are entirely different things, and you get them confused at your business's peril. Origin-based/destination-based rules only apply to how you tax buyers who live in your own state. Nexus rules apply to how you tax buyers all over the country.
4. If I use Amazon FBA I don't have to worry about sales tax
False! Amazon sellers using FBA should actually be worrying about sales tax more than other sellers, since their inventory that is stored in Amazon's fulfillment centers actually creates nexus in whichever state it sits. FBA sellers have to figure out how to track where their inventory is, even when Amazon moves in to a new center, and then register and start collecting sales tax on sales in those states.
5. I'm only on the hook to collect sales tax if my company grows big enough
Sure, chances are the authorities are not going to come charging after you for failing to collect $100 on taxes for the 20 sales you made this year after you officially established your business. But they legally can. If your sales counted as "occasional sales" of the type individuals make on craigslist or at garage sales, you probably weren't required to collect sales tax. But if you were making those sales as part of an ongoing business, you officially you owe that tax, and failing to collect and remit it means the taxman has permission to chase you.
There's no magic formula to determine when your liability in not collecting tax becomes too much of a risk. To determine when to start charging sales taxes, every businessperson will have to look to his or her own comfort with risk -- and maybe run some numbers to find the tipping point at which the potential fees and penalties outweigh the time and expense of managing sales tax.
6. Shipping charges are tax-exempt
Sellers are often required to charge sales tax on shipping and handling charges. The rules vary by state. Whether it's required or not can depend on how you list the shipping charges on your invoice, whether the items you're selling are taxable, and on how you arrange to deliver them. Check out the rules in the states where you have nexus so you'll know how to handle taxes on shipping and handling.
7. I can easily raise my prices a bit and advertise "tax included"
You can include tax in your prices, but some states have strict rules regulating it, and in many cases it is going to be way more complicated than it's worth.
8. I don't have to worry about sales tax if I just sell at craft fairs or trade shows in a state
The truth or falsity of this statement depends on where these shows occur. Some states allow businesses to sell at such shows without charging sales tax. But other states, such as New York, don't give even such occasional or temporary sellers a break.
9. Registering to collect sales tax is a mere formality
Business must register to collect sales tax in every state in which they have nexus. It's not a suggestion, it's a law (or, rather, a series of laws, as each state maintains its own regulations on how and when to do this). If you collect sales tax without first registering, states may well decide that you are conducting fraud.
10. No one will really come after me if I fail to collect sales taxes
Maybe they will and maybe they won't. It depends on many factors, including whether you were blissfully ignorant of the rules or were doing it knowingly, whether you are an out-of-state seller, and whether they had their Wheaties this morning. But the problem is you can't possibly know if your missteps will draw a blind eye, a gentle slap-on-the-wrist, or something much worse.
Especially as states start to step up their efforts to collect taxes from out-of-state sellers who have nexus there, you may be increasingly at risk to receive the "much worse" category of consequences. If you've been dodging taxes for a long time, you may end up owing more in back taxes than you can possibly pay, thus ruining your entire business. Oops.