Note: We will continue to update this post as things change. Last update on July 16, 2018
On June 21st, 2018, the Supreme Court of the United States of America overturned the 1992 Quill v. North Dakota case by a vote of 5-4. This decision opens the door for a tax jurisdiction such as a state or county to collect sales tax from a business even if that business doesn’t have a physical presence in their jurisdiction. This is a HUGE change that has HUGE ramifications for all online businesses, and you can bet that each state will be jumping on the bandwagon.
While this isn’t something that is going to be implemented overnight, it is now officially on the horizon and it is time to start planning for it. In this article I’ll try and explain how it will affect your business, as well as what solutions are available to lessen the burden.
Disclaimer: I am not an attorney or an accountant and I would STRONGLY suggest consulting one or both for advice specific to your business.
What this Means for your Business
Before this decision was handed down, you were only responsible for collecting and filing sales tax where your business had a physical presence or ‘nexus’. That could include your office or a warehouse. While some states like California and Florida are more complex, many sates have a single flat rate which made collecting and filing a relative breeze. The decision changes all of that. In a nutshell, this means that you will now have to collect and file sales tax on every order regardless of where your business is located. As of 2018, forty-five states and the District of Columbia collect statewide sales taxes:
What this graph doesn’t show you is that 38 of those states also collect local sales tax, so the tax rate you charge varies by the county or city you are shipping to. Sometimes even different addresses in the same zip code have different tax rates. The result is that there are currently over 12,000 different tax jurisdictions that create multiple rates in many states depending on the delivery address. Crazy right?
One way that smaller e-commerce merchants may get a break is by what is called an ‘economic nexus’. As of July 16, 2018, 26 states have an economic nexus defined, which sets a minimum threshold for an e-commerce retailer to hit before they are subject to sales tax. Here’s the current map:
Each state has a different threshold, and they are listed below:
Alabama – $250,000
California – $561,000
Colorado – $100,000
Connecticut – $250,000 AND 200 transactions
Georgia – $250,000 OR 200 transactions
Hawaii – $100,000 OR 200 transactions
Illinois – $100,000 OR 200 transactions
Indiana – $100,000 Or 200 transactions
Iowa – $100,000 OR 200
Kentucky – $100,000
Louisiana – $50,000
Maine – $100,000 OR 200 transactions
Massachussetts – $500,000 AND 100 transactions
Minnesota – $100,000 OR 200 transactions
Mississippi – $250,000
North Dakota – $100,000 OR 200 transactions
Ohio – $500,000
Oklahoma – $10,000
Pennsylvania – $10,000
Rhode Island – $100,000 OR 200 transactions
South Dakota – $100,000 OR 200 transactions
Tennessee – $500,000
Vermont – $100,000 OR 200 transactions
Washington – $10,000
Wisconsin – $100,000 OR 200 transactions
Wyoming – $100,000 OR 200 transactions
Note the three states in bold above with an extremely low threshold compared to other states. This will force many small businesses to collect and file sales tax in these states.
Note that the nexus threshold counts ALL of your sales, even if they are not taxable. For example, if you sell $50,000 worth of goods to a wholesaler in Ohio and $450,000 worth of goods to retail, you have reached the threshold and must collect and file sales tax on the $450,000 worth of orders. Even if your total tax liability is zero (if you sold 100% wholesale or non-taxable goods) you still have to file every year.
One additional note on selling wholesale – make sure you have a signed copy of a tax exemption certificate for every business you are selling wholesale to. A faxed/emailed copy of their business license doesn’t count!
The Cost of Filing
In order to collect and file sales tax, you need to first get a Sales Tax Permit from the jurisdiction you will be collecting tax in. Collecting sales tax without a permit is a criminal offense! States like Pennsylvania have a nice 10 page online form you fill out with no fee to do so. But that isn’t true for all states. Connecticut has the same lengthy form, but charges $100 to apply. Some states also require you to register your business in the state before you apply for a permit, and yes, some charge a fee to do so. Some states make you pay the fee every year. See where this is going?
Not only is filling out 26 forms be a royal pain for a small business, but the costs to maintain all of those sales tax permits would be cost-prohibitive as well. I don’t think the Supreme Court justices who voted in favor of this ruling really thought about what the true ramifications are for a small or even medium-sized business.
What About Automated Solutions?
Those of you who have businesses in California, New York, Florida, Washington or any of the other states with multiple tax jurisdictions may already know about services like TaxCloud, Avalara, Taxify and TaxJar. These are services that automate the calculation and even filing of your sales tax for you.
When you sign-up for one of these services, your cart is then tied into their master database of all of the different tax rates and zones. You don’t have to worry about updating tax rates every year, these guys do it for you. When a customer checks out, the cart pings their server, looks up the tax, and adds the correct sales tax to the order. Some services let your wholesale customers upload a tax exemption certificate, and then remembers them so that any future orders don’t incur tax. The order data is then saved by the service, and they then use it to file the appropriate tax return for you.
Each of these services has its pros and cons. Here are the ones we have either worked with or researched for various clients:
This is the one we have the most experience with, as we built an App for Pinnacle Cart that ties into it. We currently have about 15 clients using the service, and for the most part they are happy.
Pros: By far the cheapest solution out there, it can cost as little as $9/month for 1000 queries a month in select states if you don’t want them to file for you. If they do the filing, many states are absolutely free while others charge a percentage fee. Here’s a map that shows which states are covered:
So TaxCloud wouldn’t charge you a cent to file in Nevada, but California would be .5%. If you owe $1000 in sales tax to California, TaxCloud would charge you $5 to file.
TaxCloud allows handles real-time & batch sales tax calculation, periodic sales & use tax reporting and remittance, support for product/entity/use exemptions, support for sales tax holidays, sales tax credits (for returns and such), tax correspondence with jurisdictions, manage and respond to audit inquiries. Sound too good to be true? There are some cons.
Cons: It can get expensive if you have a busy store and don’t want them to file for you. 1000 queries isn’t a lot, as the cart will query their server even if the user doesn’t place the order.
Their service has been known to go down when under a heavy load. That results in your cart not being able to lookup taxes, and then you are stuck trying to collect additional fees from customers. They have been doing a lot to improve this, but with this decision they are going to be busier than ever.
Getting in touch with tech support can be a challenge. They don’t answer the phone often, and their voicemail box is often full. Email support is spotty, and sometimes you won’t get a response for days.
While they will file for you, they don’t handle registering your business in a jurisdiction, or obtain a Sales Tax Permit for you, so there is still a ton of work for you to do initially.
They use USPS address validation to ensure an accurate address. This can sometimes cause a valid address to be rejected if USPS doesn’t like it.
Pros: Another very similar service, these guys seem just a bit more put together than TaxCloud. They offer plug-ins for many major shopping carts such as Shopify, BigCommerce and Magento. They too have autofile and accurate rate lookups. They also support multiple sales channels, so if you sell on Etsy, Amazon or Walmart you can have TaxJar calculate sales tax for you. TaxJar also connects to Xero to help make your accounting tasks easier.
Cons: It is expensive. A basic account that just returns the correct tax rate is $19/month for 1000 transactions and the price goes up from there. That DOES NOT include filing, which is $5000/year for up to 540 autofiles. If you are a busy store, that won’t begin to cover all of the jurisdictions you need to file in. Tax exemptions are not easy, as you have to manually flag each one in TaxJar that you want to be exempt, it doesn’t currently allow this to happen automatically or for your customers to upload exemption certificates.
Pros: Probably the most well-known and professional of the three main systems, they have integrations with all of the major accounting, shopping cart and CRM software providers. They are used by some major companies, so you know they can’t get away with lousy service. They handle both the calculation and the filing.
Cons: Price. They don’t list pricing on their site for a reason. The few clients of ours that have used them report that it gets EXTREMELY expensive. Their basic service starts at $50/month, almost 5x what TaxCloud charges. Their web site is not at all informative and doesn’t answer many of the common questions about things like wholesale exemptions, product exemptions, tax holidays, etc. While the service may offer these, they don’t make it clear what you are getting unless you call them.
Pros: Integrates out of the box with Shopify, BigCommerce, eBay and a few other platforms.
Cons: Only a few out of the box shopping cart integrations (Shopify, BigCommerce, WooCommerce, Magento). No API access listed to integrate other platforms. Expensive at $47/month for 1000 lookups, and that doesn’t include filing, which is another $27/return. Web site is weak compared to the other platforms, with very little in the way of information or tax guides.
Do you need to do Anything NOW?
Yes, if your annual sales are above the threshold for a state you need to apply for a permit and start collecting sales tax in that state. Pennsylvania in particular has been very aggressive about collecting not just current sales tax, but back taxes as well. If you think you can ignore the laws and hope they won’t notice, I would strongly advise against doing so.
I would also suggest looking into the three software providers to see which one would be the best fit for your business. Make sure it is compatible with your cart software, accounting software, and whatever other sales channels you use. If you have products that are taxed differently, make sure the software can calculate that correctly. A flat tax rate for all of your products sometimes doesn’t follow the letter of the law. There will probably be many more of these types of services in the near future, as there is a lot of business to be had in the coming years.
We’ll be sure to keep this article up to date as things progress, so check back often. In the meantime, be sure and call/write your representatives and let them know what you think!
Questions? Feel free to contact us!