Can an eCommerce platform alone manage sales tax?

The short answer: Maybe not.

Let’s look at a few factors that could make relying solely on an eCommerce tax platform for compliance risky for your company.

A complex environment

Economic nexus. The 2018 Supreme Court decision in South Dakota vs. Wayfair opened the floodgates for economic nexus throughout the U.S. In almost all states now, any derived revenue for your company will create nexus for the company making that revenue ($100,000 revenue or 200 transactions in a year, for instance). These thresholds vary from state to state and change often, with Missouri being one of the latest to enact economic nexus. “Revenue” can also vary, meaning “gross revenue” in some states and “taxable receipts” or “retail receipts” in others.

(We generally recommend that companies start watching their nexus requirements when they hit the $100,000 in sales in a state. Companies also must always consider how physical presence, such as offices or even just sales reps, can create nexus.)

Taxability. Usually all retail sales of tangible personal property (TPP) are taxable, but many states have started to tax services. Who the customer is and what they’ll use the TPP for can create a sales tax exclusion, too, such as when selling to a church or government agency.

Situs. In what state – or even city, in the case of home-rule states – did the transaction occur? For a service, this generally means where the benefit of the service took place. For TPP, where did possession take place?

Home rule. This applies in states where local jurisdictions have the authority to establish their own sales tax rules. Examples of states with home rule are Alabama, Louisiana, Illinois, Colorado, and Alaska.

Yet again, this can vary. In Colorado, for instance, establishing state-level nexus means you’ve also established it in each of the home rule cities – yet the tax rules of the latter might not match Colorado state tax rules. Louisiana home-rule locations largely follow their state-wide tax treatment for TTP. In Alabama, the unified tax base means localities can’t make choices on what’s taxed and exempt.

Marketplace facilitators. Generally, a marketplace facilitator is a business or organization that contracts with third parties to sell goods and services on its tax platform and facilitates retail sales: listing the products, taking the payments, collecting receipts, and, in some cases assisting in shipment. They also take the burden of sales tax obligation off the seller. Amazon is probably the most familiar example.

You do, however, need to monitor sales if you are also selling through avenues outside a marketplace, such as your own website or other sales channels. Even though the marketplace is collecting and remitting the tax on their platform, these sales need to be accounted for to determine whether you’ve reached economic nexus thresholds.

Managing the process

Calculating sales tax. Choosing the right shopping cart/tax platform can get you started here. Shopify, for instance, has basic calculation, with an Avalara plug-in available on Shopify Plus.

The calculation should comprise the factors we’ve mentioned, such as situs, taxability, and of course tax rates (in some cases even international ones). You have to make sure these factors are applied wherever you send invoices (“tax mapping”). Managing the compliance process is ongoing, too: Registrations with states can take time, and effective dates are fluid.

Setting up a filing eCommerce sales tax process. Your first step will be reconciling rates, your avenues of sale and your invoicing. All this data needs to come together to file the sales tax return.

Next, you need a tax calendar of where you’re registered and the jurisdictions’ filing frequencies (which can change over time). You also need a system to stay on top of the many notices – some time-critical and requiring action on your part – those tax jurisdictions may pump out to your snail mail, email, or account portal on a state website.

Potential pitfalls

Can an eCommerce tax platform handle all this?

One big question can be the authenticity or viability of some existing plug-in solutions, especially when there’s been a re-calculation of tax that doesn’t match what's been charged or collected.

In general, sales tax automation solutions create questions:

• Who do you call for customer support?
• Who resolves notices?
• How are the non-pass-through taxes reported?
• How do unusual taxes, such as Washington’s B&O tax or various states’ retail delivery fees, get filed?

States take sales tax seriously and often have responsible party laws that mean one leader in your company can be held accountable – in some cases personally liable – for compliance issues.

Clearly – and as is often the case with sales tax – there are no quick, easy answers.

Listen to our “Navigating Sales Tax Compliance in eCommerce” webinar for more.

Contact us to find out if your eCommerce business needs a better understanding of your burden of sales tax compliance.

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