Ecommerce businesses not currently collecting state sales tax for sales made online in the United States may now be required to do so.
The History of Tax & Ecommerce
Before the summer of this year, ecommerce businesses were not typically required to collect and remit sales tax for individual states. Arguably, this is likely one of the key contributors to ecommerce growing at the rate we’ve seen over the past several years. After all, consumers could purchase the exact same products and pay less for the transaction if they simply did it online instead of in a physical store.
While some ecommerce businesses (like Amazon) have historically collected and remitted state sales taxes for online sales voluntarily, it wasn’t because it was a mandatory requirement. And due to the sheer amount of internal time and resources that need to be allocated to implement a dynamic process that can manage taxes in each individual state, many companies – especially small and medium sized ecommerce businesses – determined it was not feasible to do this on a voluntary basis.
Software & the Wayfair vs. South Dakota Decision
In June, the Supreme Court of the United States issued a ruling that could change everything for ecommerce businesses. The Court ruled that a state can require ecommerce businesses to collect and remit sales tax even if they don’t have a physical presence in the state. Any business that meets the nexus requirements for a state, even if the business only sells its goods online, may be required by the laws of that state to collect and remit sales taxes.
In most cases, sales taxes apply only to the sale of physical goods; however, the new ruling has caused widespread confusion in the digital realm in terms of how much these new rules apply for technology and non-physical software solutions. Also, some state tax laws specifically require digital products to be taxed, whereas other state laws classify these products as a “rental of underlying software”.
Layering in VAT and the EU
For ecommerce businesses that are also selling their products in EU nations, the Supreme Court ruling is just another complexity to toss in the mix alongside complying with value added tax (VAT), which forces international businesses selling to EU citizens to apply a tax that ranges anywhere from 15% - 27% depending on which country you’re selling in.
Unlike the Wayfair vs South Dakota decision, there is a clear understanding that VAT applies to all types of ecommerce business – even software and SaaS companies, adding yet even more accounting layers for businesses looking to capitalize on international success.
Navigating New Waters
The bottom line is, state sales tax laws are complicated and changing. If you haven’t already, start keeping an eye on how the Supreme Court Ruling will be interpreted and applied as time progresses. Many states are already beginning to enact new policies in its wake, and ecommerce businesses will want to ensure they are making strides to comply accordingly.
It’s also worth noting that the laws of each state are different. Some states specifically include digital goods in their definition of taxable goods. Even if the state law doesn’t do this, some could interpret their definition of physical goods to include digital goods, whereas others may not.
This is one of those changes that may seem substantial and overwhelming at a first glance, but it doesn’t necessarily have to be with the right help. It would be prudent to allocate some additional time seeking proper accounting consultation if you have the resources to spare. If you’re a smaller business with less accounting support, we recommend you monitor these changes as they unfold via the TaxJar blog.
A third solution is to outsource your ecommerce payment platform entirely, leaving the handling of global and local tax compliance – as well as all your other payment-specific processes – to third party professionals.
There are plenty of solutions to help you adhere to the new rules as they unfold. And regardless of which option you pursue, our team is always happy to help answer any questions you may have (however, we are unable to provide you with tax advice).