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Updated: Jul 2, 2020
It’s a different world since COVID-19 came on the scene. If there’s one bit of change that the pandemic has accelerated in the small business community, it’s the shift to e-commerce. And while states are beginning to ease their lockdown measures, social distancing seems to stay here. The existing safety measures further validate the need to transition to online stores, even if that means keeping physical locations.
No doubt that the e-commerce landscape has had some surprises for business owners. Whether it’s adapting to a new type of software or juggling increased demand from customers, there are new business challenges to confront. Chief among the changes, no doubt, is how to handle online sales tax. While entrepreneurs may have a grip on the tax dynamic for in-store sales, navigating internet business tax laws can be a whole different ball game. Let’s break it down.
As a business owner, you probably know that sales tax laws can be a tricky nut to crack, even for brick-and-mortar locations. Unfortunately, it doesn’t get any easier for e-commerce. If anything, things are murkier in the online realm as rule changes and a fragmented market keep business owners guessing, and states and local municipalities send conflicting messages. We’ll wade through some of the muck and the mire of internet business tax laws to get some clarity.
A 2018 Supreme Court decision known as the Wayfair ruling involving the state of South Dakota changed everything in terms of sales tax on internet sales. Before this decision, the tax obligation of online companies was limited in scope for transactions that were completed remotely, or in states where the business didn’t have a physical presence. In other words, the law was more generous toward business owners back then.
Those days are gone, however. Now, internet sales tax has become a cross-border affair, as states can command “remote retailers” to pay the piper. This is due to changes in what’s known as a sales tax nexus. Now, this heaps the requirement of collecting and paying sales tax on businesses when there is some connection, including but not limited to a physical one. So, this leaves room for interpretation and has led to disagreements. The glaring exception to this internet sales tax in states in which there is no sales tax requirement. These include Alaska, Delaware, Montana, New Hampshire, and Oregon, though the situation is fluid and could change.
Now that you have the background, it’s time to explore what to do with that information when navigating sales tax on online sales after transitioning to e-commerce. You can start by assessing the states in which you’ll be required to charge and pay sales tax, which could be easier said than done. Internet sales tax differs between states because each uses different criteria to determine whether your business qualifies for the sales tax requirement.
If you fall into one or more of these buckets, you should plan to do some digging into that state’s internet sales tax requirements:
There are some more steps for you to take in order to make sure you’re abiding by sales tax laws. For example, you’ll most likely need to register your business in the states where you transact. This step’s timing will vary by state but will often be tied to reaching the economic nexus level, sometimes sooner.
To that end, you’ll also be responsible for filing returns in each state you have a connection. For business owners whose time is already tight, this could seem like a daunting task – not to mention it’s pricey. But, you’ll find there are service providers that will automate the process for you. Keep in mind, too, that there are business loans available, including those offered by Funding Circle, that could help you with the transition to e-commerce.
As for adding in the tax amount to transactions, you may want to streamline your ordering process so that the system supports internet sales tax calculations. Whether you prefer to do the math manually or integrate an automated solution, like Taxjar, is up to you.
In fact, you’re encouraged to turn to an automated service provider for the following reasons:
So what does all of this mean for your e-commerce business? Basically, you’ll want to develop a tax strategy now that you have joined the ranks of online retailers, whether you are selling a product or a service. The good news is that states have been lenient with tax-filing requirements and enforcing their sales tax laws throughout the COVID-19 pandemic. So, that should work in your favor for now. But don’t wait too long. The cost of not complying with internet business tax laws could be higher than any government could heap on you.
Jessica Holcomb is the Content Marketing Manager at Funding Circle, specializing in small business marketing and social media. She has a degree from the Fashion Institute of Design and Merchandising. Prior to Funding Circle, Jessica was a Marketing Manager at a successful social games company and a freelancer for many small businesses in the Bay Area. Her work can be seen in top retail, gaming, and financial small business resource sites.