Website & eCommerce Articles

Why Sales Tax Is Now Putting Your Business at Risk

by Will Frei
Published on 7 October 2013

eCommerce is one of the fastest growing sectors of the retail economy, and that's exactly why you might be at risk. The fact that global eCommerce is expected to top $1.5 trillion in 2013 is fantastic news for savvy internet retailers.

However, businesses aren't the only ones who see potential, and state and local taxing jurisdictions are taking new steps to tap this sector as a revenue stream. Unfortunately, many online retailers in the USA remain unaware of new and changing sales tax rules. This puts them at risk when it comes to compliance.

In this post, we will explain new trends in online sales tax and offer tips for how to reduce risk for your business.

What's happening to the online sales tax landscape?

Before the first ice age, when mail order catalogs ruled the earth, the US Supreme Court decided that a state could not make a business collect sales tax if the business didn't have a physical presence in that state.

Two things have happened in the wake of that primordial decision:

  1. Online commerce came to rule the remote-seller landscape, meaning that there are now many remote businesses that do not have to collect sales tax.
  2. States are expanding sales tax law, stretching the definition of physical presence to try to make more of those businesses collect tax.

Let's examine that last point. Did you know the following?

  • Since 2008, New York has required businesses with over $10,000 per year in affiliate-related online revenue to collect sales tax.
  • California has a similar law and is in the process of hiring 100 new state auditors and specialists to go after businesses that aren't complying.
  • Colorado now requires businesses that make over $100,00 per year, but don't collect the state sales tax, to provide the state and their customers with reports of how much tax Colorado residents owe.
  • There is federal legislation before the House that, if passed, would give states the right to require online retailers to collect sales tax, regardless of physical presence.

Perhaps you did know of these developments-well done. But many online businesses don't realize that new sales tax legislation isn't just for the likes of Amazon and eBay; it impacts them too.

What you can do

Without the right sales tax management application, your growth as a company may increase the risk of a negative tax audit. How? As your business grows, selling into new markets, you will likely encounter more of these new laws. And trying to manage sales tax laws in multiple states manually is tricky, if not next to impossible.

So what's a smart and savvy ecommerce retailer to do?

Here are three steps you can take right now to help reduce your sales tax risk.

  1. Evaluate your sales tax risk. How many states do you sell into? As a general rule, the more states you do business in, the greater your risk. Keep in mind that some states like California and Colorado have complex tax systems that make compliance more challenging. If you feel lost, you may wish to outsource a sales tax risk assessment to an accounting firm.
  2. If you find that your sales tax requirements are minimal, but still overly time-consuming, explore the use of free online tax rate tools, like those on taxrates.com. These can help you save time and keep up with major tax changes.
  3. For many businesses a complete sales tax app that automates the process from start to finish is the best option. Consider an app like AvaTax that integrates directly with your shopping cart or financial application to deliver automatic calculation, filing, and reporting.

Taking these steps now will help ensure that you don't get any nasty surprises that will impede your growth.

Keep calm and sell on.

Guest post by by Will Frei, Sales Tax Specialist at Avalara


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