There are still many who view the convenience of online shopping as the real lure of Internet shopping rather than the presence or absence of sales tax.
While many people shop online for convenience, others turn to e-commerce to avoid paying sales tax. According to the Supreme Court case Quill v. North Dakota, retailers are only required to collect and remit sales tax when they have a physical presence — called a nexus — in that state, such as a storefront or distribution center. This is why many online retailers are able to sell their products tax-free to customers in most jurisdictions.
Customers Spending Less to Account for Sales Tax
A Washington Post report published online by the Chicago Tribune notes one retail giant saw a reduction in product sales where shoppers were spending less on merchandise to account for the sales tax being added to their purchase, even though they continued to spend the same amount of money overall. For online retailers, this report highlights the critical importance of tax calculation accuracy, as over-charging tax may negatively impact the bottom line.
Revenues at brick-and-mortar retailers have gone down significantly due to online shopping. Affected retailers have asserted that when online retailers are required to collect sales tax it levels the playing field and helps brick-and-mortar stores better compete in today’s market. Online retailers are facing an ever-changing compliance landscape and a potential future state where they may be required to charge tax everywhere.
New Laws Add Challenging Compliance Requirements
States are now testing the limits of the Quill ruling by passing new laws, such as the one passed in Colorado requiring remote sellers to notify buyers in those states of their obligation to pay use tax, and then to report those customer purchases to a state reporting agency. Such laws add challenging compliance requirements and leave vendors with the question of whether it might be easier to simply collect tax.
The Colorado law has been ruled constitutional in DMA v. Brohl. States — South Dakota, for one — have enacted new laws requiring out-of-state online retailers to collect sales tax after they have met a certain sales threshold for transactions taking place within their state — deeming this threshold an “economic nexus.” Laws like these will continue to push the limits of Quill as more states attempt to collect sales tax on internet sales from out-of-state sellers.
Iowa: Charging Sales Tax Despite No Legal Requirement
Iowa is one example of a state that loses millions in sales tax revenue from out-of-state online retailers selling to its residents. The Department of Revenue estimates that Iowa loses between $18 million and $24 million in sales tax collections to online retailers with no in-state presence.
One online retail giant selling to Iowans made the decision to voluntarily pay sales tax in Iowa and other states even though it had no physical presence there. The retail giant announced late December it would start collecting Iowa’s 6 percent sales tax at the beginning of 2017 on all internet sales in the state; however, it’s unclear what prompted the change.
The Real Winner
Most view the convenience of online shopping as the real lure of e-commerce, rather than the presence or absence of sales tax. In a world where brick-and-mortar retailers apply the same sales tax rules as their online brethren, the real winner is the economic principle of neutrality, meaning that convenience and personal preferences (and not tax considerations) dictates how people choose to shop.
Conclusion: Sovos Shoulders the Burden of Compliance
Sovos will be monitoring legislative updates as more and more states may be motivated to impose compliance requirements on internet sellers. Facing growing calculation and compliance requirements for online transactions, retailers will continue to find reliable, up-to-date, integrated sales tax calculations in their Sovos Compliance Systems.
The post Are You Collecting Sales Tax for Your Online Sales? appeared first on Sovos Compliance.
About the Author
Elizabeth Salow Quintana is an attorney and a member of the Tax Research team at Sovos Compliance. She has wide experience researching and analyzing federal, state and local corporate compliance issues. Her current responsibilities include in-depth research of US state and local tax calculation and compliance issues, with a growing specialty in the indirect tax regimes that apply in the Commonwealth of Puerto Rico. She is a member of both the Florida and the Massachusetts Bar.More Content by Elizabeth Quintana