eCommerce Sellers Sales Tax Update
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
A recent study carried out by Avalara showed that many companies have not been compliant with the Wayfair ruling of 2018, meaning that they have failed to collect and submit sales tax. According to Michael J. Fleming, one of the reasons behind this noncompliance is simply a lack of knowledge. So what do eCommerce sellers need to know about sales tax in 2020?
Whether or not you need to file for sales tax as an eCommerce seller depends on a number of different factors. For example, physical nexus could be created on the basis of having inventory in Amazon warehouses, even if the seller is not physically present in a given state.
In this week's episode of Sales Tax and More, co-hosts Michael J. Fleming and Ellie Moffat talk about the collection and filing of sales tax for eCommerce sellers. Tune in as they discuss how sales tax applies to sellers using different online platforms, why some companies have been reluctant to comply with the Wayfair ruling, and how this non-compliance will impact their businesses.
Here’s a glimpse of what you’ll learn:
Do eCommerce sellers need to be concerned with sales tax?
Michael J. Fleming explains the connection between selling on online marketplaces and sales tax
How sales tax applies to sellers using Shopify, BigCommerce, or their own websites
Can inventory in Amazon warehouses create nexus in some states?
Why some companies have not been compliant with the Wayfair ruling and the consequences they may be facing
Where to get in touch with Sales Tax and More
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax & More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now, here's your host, Michael Fleming.
[0:26] Mike: Hi everyone. Mike Fleming, founder of Sales Tax and More and today's co-host of the Sales Tax and More podcast where we talk about everyone's favorite topic, which is of course sales tax. Today my co-host Ellie Moffat will be interviewing me about eCommerce sellers and what they should be doing today, where you know, two years post-Wayfair what are their responsibilities? What do the states want them to do? But before we get started, I'd like to introduce you to Ellie.
[0:59] Ellie: Hey, everyone is really great to be here. And yeah, we're talking about everyone's favorite topic, like Mike said, sales tax. And before we do that, I'm going to do a quick introduction for Sales Tax and More. So, Sales Tax and More is a full-service consulting and solutions firm. We have a really great team here of experienced tax professionals who are very dedicated to fulfilling any of your state tax or related needs. So we do a lot of sales tax returns, sales tax registrations, consulting, research, and like our name states more. If you have questions about our services or wondering if we do something, we will give you plenty of ways to reach out to us and we hope you do so. So Mike, gonna jump right in here to our first, my first question for you. So do eCommerce sellers need to be concerned with sales tax?
[1:50] Mike: Well, Ellie, you know what my favorite answer is? It depends. And we've got a real comedy dichotomy going on here. You know, if you sell only on a marketplace, like an Amazon or an eBay or an Etsy or Walmart.com you know, the future looks very bright going forward because you don't have to worry about sales tax in most states because the state has mandated that the marketplaces themselves collect the tax. And once the marketplace begins collecting the tax, you don't have any further responsibilities. There are some exceptions there, but for the most part, that's what it is. Now, for those who are selling on a marketplace, and maybe a brick and mortar location, or on a site like a Shopify or BigCommerce or a WooCommerce, you know, or your own website, these are not marketplaces. So it's actually gotten more complicated and more confusing. There are a number of different reasons why you may need to get registered. One of them is economic nexus where we get a look at the thresholds, the other, you know, maybe physical activities or that you have in these states. But yes, you actually have to be concerned with this. Even foreign sellers need to be concerned with sales tax if they're selling on more than a marketplace. And you get to know the distinction between what's a marketplace and what's not a marketplace.
[3:35] Ellie: So Mike, back to kind of what you're saying at the beginning of that here, are you saying that if you only sell on a marketplace like Amazon and eBay, you don't have to worry about sales tax?
[3:48] Mike: Well, in general, the answer's yes, you don't have to do it, but it depends, and in this case, it's gonna depend on making sure you're only selling on marketing places. Number two, there are some states that you may want to stay registered in like your home state, always a good idea to be registered in your home state. For exemption certificate, you know, resale certificate purposes, you know, if you're shipping all of your inventory to a state like California in order to issue a valid resale certificate, you need to be registered in California. So there are 10 states like that, maybe you need to stay registered for that reason, either that or if you're shipping all of your inventory to Amazon and in California, then maybe you ask to ship it to another state, but you may have to be registered for exemption certificate purposes. The State of Washington has the business and occupation tax, which is a second tax on the sales tax form. So the marketplace is not required to pay that for you, you still need to pay that. So you may need to stay registered or get registered in a state like Washington, which has this business and occupation tax. There are three states where the marketplaces are not collecting yet, and that's Florida, Kansas, and Missouri. So in those three states, you may want to stay registered or get registered. I think that we'll see Kansas and Missouri, you know, once their legislators actually start meeting again, I think we'll get to see some marketplace facilitate a language coming out of those states. Florida, the governor says he's going to veto it so we may never see, you know, a requirement for the marketplaces in Florida to collect the tax because the marketplaces aren't stepping forward and doing this out of the goodness of their heart. They're doing it because the state's making them do it. So for the most part, yeah, you're absolutely right. If you're only selling on a marketplace and you have to make sure that you're only selling on a marketplace, then you can forget about sales tax going forward. Now, I say going forward, because states like California are still pursuing sellers for the sales tax. You know, looking backward states like Washington. We tried to do a VDA for one of our clients there the other day and all of a sudden they started bringing up notice and reporting requirements. Now, they'll waive those penalties for the most part, but they're still talking about it. So if you've got past exposure, even though you're only selling on a marketplace, these states may come after you for past exposure. But going forward in the majority of the states, there's no longer requirement to worry about sales tax or collecting sales tax. Now, I predict the next big battle for especially Amazon sellers is going to be and larger Amazon sellers, you know, three, four, or 5 million and up in sales, and I expect this to be income tax. I think that that's, you know, six months to a year down the road. And when you are deregistering now in a state like Texas that automatically signed you up for their franchise tax, you still have franchise tax responsibilities. So even though you may be de-registering for sales tax, you still have to worry about that franchise tax and continue to pay that. And a number of states are like that.
[7:49] Ellie: Yeah, Mike. Our favorite answer like you said, again, it depends. So Mike, if you are selling through Shopify, BigCommerce, your own website, and then you still don't have to worry about sales tax or because you could expand on that.
[8:07] Mike: Yeah, actually, you have to worry about sales tax. And there's a number of different things that we get to look at. Number one is economic Nexus. And you know, maybe you only had to worry about collecting in your own state up until this point, you didn't have inventory in the Amazon warehouses or anything. You didn't have any salespeople traveling throughout the country. You didn't have any inventory and other third-party warehouses. But now, just having a certain number of sales in a state, it could be based on dollar amount, the most common dollar amount is going to be $100,000. Or it can be based on transactions. The most common transaction number is 200. Now not every state has a transaction threshold. But in the states that do 200 transactions, there are not a lot of transactions at all. And the states take this very seriously. Now I think what you need to use common sense if you get 200 transactions and $5 of sales, that's $1,000 in tax, excuse me, $1,000 in sales, totaling about $80 in tax. So I think we have to use common sense, just because the state says that you should do something doesn't necessarily mean it makes good business sense. Sometimes we're better off waiting for the state to come and find us. Now, if your sales are material, that's not a good strategy. But if you only have $1,000 of taxable sales, I mean, heck, the cost of getting registered, even if you do it yourself, there's the opportunity cost in there. It's going to be more than $80. And then a lot of states you know, take Georgia for instance, they're going to start out as a monthly filer. So you've got $1,000 in sales, how much tax Are you going to be paying per month? And you either have to take the time to do this yourself or you pay someone else to do those returns for you. So I think we've got to use some common sense and take materiality into consideration here. But if your exposure’s material, and that's going to be different for each one of you, then I think that we should go out and get registered whether it's because of economic nexus, you know, the 200 transactions or the $100,000, whether it be physical nexus, I mean, even though Amazon is collecting tax in most states, now, you still have a link or connection with that state because of the inventory in that warehouse.
[10:50] Mike: You know, a lot of Amazon sellers are going to say, Well, this is like I'm having a brain freeze, I'm sorry. We'll come back to that. But the point is Amazon should be paying the tax there. They should be collecting and remitting the tax. But having inventory there still creates nexus in most states. Now since the marketplaces have started collecting, there are some states that have said okay, we're no longer going to consider inventory to be nexus creating states like Texas is said that. Amazon inventory, you have inventory in any other type of three PL in the state of Texas, that is Nexus creating. The State of Arizona has come out and they said it's going to be self-directed. If you sent it here, knowing that it was going to be stored in a warehouse in Arizona, then that's going to be nexus creating, but if you just sent it to Amazon and they moved it there. That's the Nexus creating. But most states still say that if you have an inventory in an Amazon warehouse that creates nexus. So if you're selling on other platforms, you still have to worry about that nexus being created by the inventory. Other three PLs, I had someone say, Well, this is not an Amazon warehouse. This doesn't create nexus. Now owning tangible personal property in the state in most states is going to be Nexus creating An example of one that doesn't is New York, but just about all the other states that are going to create nexus for you. And here's a big one. The physical activities, you know, nowadays, we're seeing more and more wholesale companies or manufacturers. You know, we've seen this accelerate since the pandemic, shut down a lot of businesses, they're deciding that they're going to sell directly to the public, some of them are saying, Well, I'm just gonna wait until I cross these thresholds before I get registered. The problem is, once a company has nexus, it has nexus for all business channels. So maybe you have manufacturers reps or wholesale reps or independent contractors, you know, throughout the country and third parties can actually create nexus for you if they're helping to establish a market. You may not have worried about sales tax before because there were no taxable sales. But there's a Supreme Court case, it's called National Geographic. It's a US Supreme Court case. It says the taxable activity doesn't have to be related to the nexus-creating activity. So in this instance, your sales over the internet have a taxable activity. And the nexus-creating activities can be the wholesale reps. So even though there are two different divisions or two different business channels, once an entity has nexus, you've got to collect tax on all of the taxable sales.
[14:02] Ellie: Thank you so much, Mike. And we are a little more than two years past Wayfair, which threw out the need for physical presence, and gave us economic nexus. Do you believe that people are compliant?
[14:17] Mike: I believe some people are compliant, but I believe there's a much greater percentage that are not compliant. Amazon, excuse me, not. Amazon. Avalara just did a survey and they said that 50% of all respondents in the survey were not compliant. Now, I tend to think that some people didn't respond to the survey because they weren't compliant and didn't want to respond. So based on our personal experience, you know, our sales team is talking to people out there. In my conversations with people, I think that it's a bigger number than 50% and you know, it's for a lot of different reasons. I mean, some people are just nexus, what we call nexus naysayers. They just don't believe that the states have the right to force them to collect taxes. And no matter what you say, there's a group of them out there, they all talk to each other. They're all in an echo chamber. And they say that the states don't have these rights. Well, one by one, I think that these companies are going to find out the hard way that yes, the states do have these rights. And that all of these people who are whispering in their ears have led them down the wrong path. A lot of people tell me that Congress is going to step in and save the day. Well, I don't know about you, but Congress pretty much did nothing for Congress for at least the last 10 years and 15 years, 16 years. However far back you want to go but on some topics they've always been a do-nothing Congress. And you know, when it comes to nexus, this is one of these areas. I mean, back in 1959, there was an income tax case it was called Northwestern cement. And Congress acted pretty swiftly within seven months when they passed legislation called the interstate income act of 1959. Or, as it's commonly called Public Law 86-272. But when they passed this, it pretty much nullified the Supreme Court opinion at that time, but they came out, they said, Nexus was so complex and so confusing, that they couldn't make a permanent, ruling that this was only a temporary solution until they could form committees and do studies and talk about this before they came up with something that actually was a permanent solution. But that was 61 years ago. Still have this antiquated temporary solution. So 61 years and if anything, nexus is much more complex today than it was back in 1959.
[17:10] Mike: So if you're waiting, you know, maybe your great-great grandchildren might benefit from something Congress does. But I don't see any relief whatsoever coming from Congress. And even if it does come, how much damage can the states do? By the time Congress finally gets around to doing something? So I don't think that you can wait for Congress to step in here. The states are pursuing people now. And the other thing I hear is, well, you know, there's gonna be a lot more lawsuits about this, and this is going back to the Supreme Court. Well, now maybe Congress does act, maybe this doesn't go back to the Supreme Court, but again, how much damage is going to happen? How much money are you going to owe the state's waiting for that to happen? If it ever does happen, I mean, it may go back to the Supreme Court and the supreme court may make it worse for sellers rather than better, or they may not, they may refuse to hear the case or, you know, it's neutral. So I don't think that we can be waiting on others to save us. I mean, if you've got exposure, I think the time to act is now. And then perhaps the biggest reason why companies are not compliant is lack of knowledge. You know, so many times our salespeople come back and say, Well, I talked to this company, and they said they had their accountant look into this five years ago. Well, guess what? The world has changed in the last five years if they had the right answer five years ago, I can almost guarantee you it's the wrong answer today, because with the Wayfair case, the universe has changed. I mean, companies that never had a responsibility to find anywhere but their home state, or maybe not even there, if they were in one of the no sales tax states all of a sudden, have a responsibility to file everywhere. And it's not just based on whether you sell on the internet, if you're selling on the phone, if you're selling by referral or if you're selling by infomercial. I mean, this is not an internet-related issue. This is a multi state issue, no matter how you're selling into multiple states, if you are, this could impact you. So a lot of times it's their own lack of knowledge. Sometimes. It's their trusted advisors, their CPAs, their accountants, their attorneys, believe it or not, a lot of them are still not up to this. So it's all about education. It's all about knowledge, you know, educating yourself so that you can talk to your clients. And that's where our webinars really come in. And we have a lot of accounting professionals coming and finding out the basics. What they need to go out and talk to their clients about and you know Ellie it's really a shame. Because prior to the shutdowns, you know, the states got a little bit friendly during the shutdowns but prior to that they were gearing up to go after sellers for economic nexus really hard because they know the same thing that Avalara knows less than 50% or 50% of the people out there are not compliant. We've already seen the state of Maine, the state of South Dakota, really start cracking down. We've seen the state of Utah purchase a list of people they thought had crossed their thresholds which are $100,000 or 200 transactions and it was effective on January 1 of 2019. So they started calling everybody all those things were put on hold while you know the businesses were shut down. I think these states are going to, they've already started coming back. But I think that they're going to start making examples of people left and right. And they have to, I mean, they've, you know, historically coming out of a recession, they've needed to fill their coffers back quickly. And one of the ways they do it is by increasing their discovery efforts, increasing their compliance efforts, they're auditing, their collections in this time is not going to be any different, except that the states were already gearing up for it, because they want this economic nexus. And while the states are primarily looking for economic nexus, which, you know, if they find you some of these states, it's greater than two years now. They're going to stumble across all types of nexus in you know, especially independent contractors, third contractors for some of these companies with traditional businesses. That's the biggest one that trips them up in the states are going to find that so I think it's a, it's a real shame. I mean, we've got a perfect storm where all these bad things are going to be happening to companies out there who are not being proactive and are not taking action. So, anyway, there are options out there where you can mitigate some of your past exposure if you're proactive. If not, states can go back seven, eight, ten years or even longer, and want all of the back tax all of the penalty, and all of the interest
[22:37] Ellie: Thank you. Thank you so much, Mike. We really appreciate you letting me grill you for these podcast episodes, and to everyone, if you have sales tax needs, Sales Tax and More offers many solutions and services. You can reach out to me directly at emoffat@salestaxandmore.com. That's emoffat@salestaxandmore.com all spelled out. You can also reach out to us through our website. That's www.salestaxandmore.com. And in addition to the services that we offer, we also have a lot of resources out there for you. We have a lot of webinars that offer CPE credit. We're always pushing out content, we're staying up to date on what's happening in the sales tax world. So please follow along with us, join our mailing list, and we hope you listen in next time. Thank you so much.
[23:37] Mike: Thank you, everyone. See you in the next episode.
[23:41] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.