Your Ecommerce Business Might Owe a Ton of Taxes You Don't Know About
The saying goes that the only two certainties in life are death and taxes. The current manifestation of that axiom is state governments are poised to aggressively pursuing uncollected sales and use taxes from ecommerce sellers.
Last month, the National Conference of State Legislatures issued a report which estimated the aggregated missed revenue from sales and use taxes was $26 billion in 2015. That marks a double-digit percentage increase from the $23 billion in uncollected funds when they first started tracking those numbers three years prior. If you make sales online, even as a third-party seller via Amazon or eBay, there's a good chance you're not collecting the appropriate sales tax for your products and offerings.
As those lost sales aggregate across thousands of sellers like you, states are taking notice and will seek their cut. When that tax bill arrives (which it will), it could be a disaster for an unprepared ecommerce site owner.
"As states across this country come under increasing funding pressure regarding their respective budgets, more and more of them are looking at sales tax revenue from ecommerce and remote sellers as a potential revenue-generating boon," said Mike Stokke, chief executive officer of Ampersand Accounting, a leading consulting firm that specializes in sales tax management and compliance for ecommerce retailers. "That boon could completely blind side online businesses that aren't even aware of the growing importance surrounding this online sales tax issue.''
For years, online storefronts and web-based retailers have sold physical and digital products without collecting a dime of state sales tax. Those ecommerce entrepreneurs can largely thank the U.S. Supreme Court and its 1992 decision Quill Corp. v. North Dakota, 504 U.S. 298, which blocked any given state from requiring the collection and remittance of sales tax from businesses, also known as remote sellers, which did not have a physical location, inventory, business assets, employees or sales agents within that state.
So, for more than 15 years the door was seemingly shut on states seeking sales tax revenue from remote sellers; however, shifts in the ecommerce marketplace are now cracking that door open -- possibly wide open
Consider that during the last several years, marketplace platforms have given third-party sellers access to their millions of buyers and fulfillment services for a piece of the sellers’ action. The most popular of these is Fulfillment by Amazon (FBA), commonly referred to as Amazon FBA.
With Amazon FBA, a third-party seller’s products are shipped to and stored in a number of Amazon warehouses throughout the country. The risk to FBA sellers and other remote vendors is that under the Quill decision, remote inventory in other states may now create “physical presence” within those states.
For example, even though an FBA seller might not live in Pennsylvania, the stuff that's stored at the Amazon warehouse in Hazelton actually causes all sales by the FBA seller to Keystone State residents to be subject to sales tax.
But that’s not all.
Several states and tax commissioners are attempting to expand that legal precedent in the hopes of channeling the billions of dollars at stake into their respective state coffers.
Specifically, they want to base remote sales tax collection on a preset threshold of sales or transaction volume, regardless of whether the physical presence principle of Quill has been met.
At the same time, other states are seeking to put their own laws on the books to enforce collection of the errant sales taxes as they are also beefing up their sales tax auditing ranks and resources to go after remote sellers.
"States can go back several years, in some cases up to 10 years to recoup sales tax that you didn't collect but should have. They can also tack on penalties as well as interest. That's an unforeseen expense that many online retailers and ecommerce sites are currently ignoring or are unaware. Their business could be out of business in short order as a result," said Stokke.
The reality is that state legislatures, judiciaries and executive agencies are unifying around this issue because many of them see it as an issue of fairness. Brick-and-mortar stores that are operating within any given state have to collect the respective sales and use taxes, plus have the necessary licenses, permits and variances to do business within that state. Many lawmakers believe is an unfair competitive advantage for remote sellers that few ecommerce sites play by those same rules.
This issue of economic fairness has bubbled up to the federal level where a handful of U.S. Senators reintroduced legislation last month titled the Marketplace Fairness Act to help level that levy-collection playing field for state sales tax. A similar piece of legislation called the Remote Parity Transaction Act was simultaneously relaunched in the U.S. House Representatives. Both proposals have bipartisan support, which suggests that any business generating online sales can no longer afford to ignore this issue because Washington is not ignoring it.
"Ignorance and denial are not sustainable business strategies as state agencies will only become more aggressive in the pursuit of untapped revenue stream -- -but there are steps that businesses can take regardless of their size," said Stokke.
The first step is getting answers to some basic questions on the topic. Then consider an expert assessment of what your sales tax situation might be. Once that situation is clearly defined, and an action plan is developed, it's important to follow through.
That can mean a sales tax expert intermediary files an anonymous, voluntary admission of non-compliance on your company's behalf. That proactive outreach usually results in the waiver of any penalties and perhaps a smaller retroactive sales tax liability of no more than three years. In several states, that liability can then be amortized for up to three years and paid on a monthly installment plan.
Once the compliance plan is in place, it's much easier to keep your ecommerce business on the right side of the state sales tax law going forward.
"Entrepreneurs take voluntary steps to mitigate risk all the time. They structure their company as an LLC or S-Corp to limit personal liability. They may also buy fire insurance or product liability insurance to protect their hard assets from risks. While those are potential risks worth considering, the single biggest risk to an ongoing e-commerce business is not collecting and remitting the required sales tax of the government, and governments are coming to get it," Stokke said.
But the key is taking the initiative on behalf of your business first and not waiting for the state to come knocking.
"Once a business is contacted by an auditor, there is little opportunity to implement liability-minimizing tactics," said Stokke. "States also share information with other states, so it's possible that your company may be contacted by several states over a short period of time concerning a sales tax audit. The only way to minimize exposure and limit the risk is to address these issues aggressively and proactively."