Internet Sales Tax
If you know me, you know I have worked in the e-commerce industry for around 10 years. If you are not familiar with me, I have worked in the e-commerce industry for around 10 years, nice to meet you. In the last few years, specifically last year, internet sales tax has been a hot topic. As a professional in the e-commerce industry, let me come out and say I am for an e-commerce sales tax.
Taxes suck, I think everyone can agree on that. But the situation we have gotten ourselves into sucks even worse. Last year a major court case was lost, it might have went under the radar of people not in the industry, but it was a stark awaking for people in the e-commerce industry. South Dakota vs Wayfair was decided by the Supreme Court of the United States in June of 2018. To paraphrase the ruling, it allows states to charge sales tax even when a company does not have a nexus in that state.
What does that mean?
If you remember the old as seen on tv commercials, you likely remember the quick words at the end where they would say so-and-so state has to pay sales tax. Its because that is the state the business is in. What this ruling means is that no longer matters, any state can require any company that does sales in that state to pay sales tax. In the past the burden was on the consumer, which admittedly I can imagine none remitted sales tax. But this shift to e-commerce companies is quite burdensome and worrisome.
How it works now
Imagine throwing tax code at the wall and hoping some sticks. That is what we have now after the Wayfair ruling. As of January 1st 2019 32 states collect sales tax if you sell in their states with no nexus. Seems simple, right? Actually… Merchants have to deal with 32 different idiosyncrasies. See the table below on how tax is currently collect in the 33 participating states.
|Rhode Island||$100,000 or 200 transactions|
|Hawaii||$100,000 or 200 transactions|
|Washington||$100,000 or 200 transactions|
|Maine||$100,000 or 200 transactions|
|Vermont||$100,000 or 200 transactions|
|Illinois||$100,000 or 200 transactions|
|Indiana||$100,000 or 200 transactions|
|Kentucky||$100,000 or 200 transactions|
|Maryland||$100,000 or 200 transactions|
|Massachusetts||$500,000 or 100 transactions|
|Michigan||$100,000 or 200 transactions|
|Minnesota||10 retail transaction totaling $100,000 or 100 retail transaction|
|North Dakota||$100,000 or 200 transactions|
|Wisconsin||$100,000 or 200 transactions|
|New Jersey||$100,000 or 200 transactions|
|North Carolina||$100,000 or 200 transactions|
|South Dakota||$100,000 or 200 transactions|
|Colorado||$100,000 or 200 transactions|
|Connecticut||$100,000 or 200 transactions|
|Arkansas||$100,000 or 200 transactions|
|Georgia||$100,000 or 200 transactions|
|Iowa||$100,000 or 200 transactions|
|Louisiana||$100,000 or 200 transactions|
|Nebraska||$100,000 or 200 transactions|
|Utah||$100,000 or 200 transactions|
|West Virgina||$100,000 or 200 transactions|
|New York||$300,000 or 200 transactions|
|California||$100,000 or 200 transactions|
Looks simple, right?
Oh, its not, its actually quite complex and burdensome to small e-commerce shops. If you think about it on a purely numerical level, its the kind of change that can put companies out of business. I take a lot of my thoughts and opinions from what I see in the real world, so let me extrapolate. The majority of the states have a $100,000 or 200 transaction limit. But what does that really mean? 200 transactions is not a lot of transactions.
Consider a company that sells t-shirts. T-shirts generally sell in the $15-$20 range, and the site make about $5-$8 off of each shirt sold. So lets just use Maine as an example. If you sell 210 t-shirts to Maine at $20 apiece, you would gross $4200. Of that you would actually profit, between $1600 and $1050. But now you have to deal with tax remittance. This is a huge added cost to merchants, especially small merchants.
The costs start to pile up pretty quickly when dealing with this taxation system. See, there are no e-commerce shopping carts that can handle tax in the US correctly. Not many people realize it, but there are over 10,000 different sales tax zones in the US. Most states have base sales tax, then the counties add a sales tax on top of that. Then the cities or towns in the counties can add a tax on that. Sales tax is complicated to collect for internet retailers. Sales tax cannot be figured by just zip codes, zip codes bleed over into multiple tax zones frequently. Tax has to be figured by the actual address.
Now, since you have to figure tax by the address, you need an external service to do that. That is where companies like Avalara or Tax Cloud come in. You either pay a monthly fee, or a fee per tax lookup so that your site can figure and collect tax properly. That is another added expense.
You then have to start applying for sales tax permits in these different states. That cost money. You have to have an accountant file taxes for you in multiple states, that cost even more money. If you don’t sell enough one year to be taxed in a state, you still have to file, or you will get penalized. That costs even more money.
The oh fuck moment
What happens when you have an “oh fuck” moment? Think about this, you sell t-shirts, last year you look at your sales and you sold 45 shirts to Maine, so you do not need to collect sales tax in Maine. You release a cool t-shirt this year, and for some strange reason people in Maine love it. You sell 400 shirts in Maine this year. But “oh fuck” you did not collect sales tax in Maine this year, because your last year sales were too low. You would have to pay the tax out of your pocket, or try to fly under the radar and hope not to get noticed (break the law).
These laws, with their high dollar limits look like they are targeted at large businesses, unfortunately they are not. They were actually lobbied for by bigger businesses to squash out their smaller rivals.
This is why I am for an e-commerce sales tax. A flat tax. All sales are taxed at that rate, then remitted to the nexus state. This would require either none or minimal extra accounting to the e-commerce sites, it would provide tax revenue to the states. It would not give one state an advantage over the others, it would be flat and fair. Something needs to be done with e-commerce tax legislation or we will end up with only a handful of large e-commerce sites, and small sites will be put out of business like small mom and pop stores were put out of business. These tax laws are an attack on small businesses.