Over the past two years, there have been a lot of changes to the online sales tax laws for eCommerce merchants. Online sales tax has always been tricky for digital businesses, and a ruling in 2018 has made it even more complicated. It can be difficult and confusing to keep up with all of the changes in online sales tax coming your way as an eCommerce business. Your Magento website needs to be in compliance with these guidelines and laws to avoid hefty tax fines and penalties. Below is our comprehensive online sales tax guide to help you understand the new eCommerce sales tax rules Magento websites need to be aware of.
Do I Need to Charge Sales Tax on My Website?
Previously, the burden of paying online sales tax fell to the buyer (customer), not the seller (business). Some states added a column on your end of the year tax forms to claim how much you spent on online purchases for the year. The states would then individually tax this amount, collecting the online sales tax owed directly from the consumer. With this latest ruling, ecommerce businesses are now responsible for collecting the online sales tax at the time of the sale, and then paying that tax directly to the state. If this sounds complicated, that’s probably because it is. You can avoid confusion, missed deadlines, and tax fees by signing up for managed services from Forix and our tax solution partners.
When Does Internet Sales Tax Start?
To collect online sales tax from retailers, each state needs to have a law in place to define the expectations of each type of business. As an online retailer, you need to be aware of the eCommerce sales tax rules of each state and collect the correct amount of online sales tax for each billing address. Failure to do so could result in large penalties and fines. Because this ruling is still very new, states are scrambling to update their laws in order to collect their share of the online sales tax they are now owed. In the coming year, a total of 43 US states will have implemented ecommerce sales tax laws, many with complicated individual rules and criteria for sellers to consider.
The exact date of when the sales tax will start depends on the state. Some states have already implemented their sales tax requirements, most of which went into effect on January 1, 2019. Other states are in the process of enacting new sales tax laws that will go into effect in 2020. To help you keep track of current and upcoming sales tax requirements, we have created the graph below, illustrating all of the start dates for each of the states with nexus laws.
What Is Economic Nexus?
A physical presence is no longer a requirement for paying online sales tax in each state. If you sell a product to a customer in a state with one of these laws, you must collect the online sales tax if you meet that state’s economic nexus criteria. Therefore, it is essential that you understand the economic nexus parameters for each state and determine if you meet each individual state’s criteria. Economic nexus is the level at which you do business in each state. Most states determine nexus by a dollar sales amount, total number of sales, or a combination of both.
Which States Have Nexus Laws?
Economic nexus is determined on a state-by-state basis. Each state has slightly different terms to amend the above criteria. Keeping track of each state’s online sales tax laws can be rather difficult if you are not versed in the law. Some states define economic nexus for an online retailer based upon a minimum number of sales in the state. Others base their criteria on a minimum dollar amount of sales. Some states have more complicated criteria, such as where the eCommerce retailer advertises their products, that define what it means to have economic nexus in the state.
We have compiled a list of states that currently have their own economic nexus criteria laws. The date the eCommerce sales tax laws apply and the nexus criteria are next to each state.
If this seems complicated to keep track of, we have an easy solution for your business here at Forix. Our team can help you understand the latest updates, giving you peace of mind that your business is in compliance with the laws.
Managed Services for Online Sales Tax Collection and Payment
Forix can help you stay on top of the eCommerce game with online sales tax compliance. Our team has done their research and is up to date on the latest rulings about online sales tax in all 50 states. We have the latest software for Magento sales tax setup at our fingertips, ensuring your business will stay in compliance through any new rule changes. Don’t spend too much time researching the legalities of these new laws when you can instead focus on running your business. Let our trained professionals keep your website up to date for you, saving you time and money this year. Our 24/7 support will monitor any new changes as they are released, always keeping your business in accordance with the current eCommerce sales tax laws.
A Magento website will also help to streamline the process for your customers. We’ve partnered with ecommerce tax software companies TaxJar and Avalara, which will incorporate sales tax collection right into the checkout process. The software calculates the tax based on the billing address of the customer automatically, saving you the time and energy of calculating it all yourself. Your dashboard provides a full report of what your business owes to each state, giving you a clear way to track all amounts owed. You can clearly see in which states you have the most presence, helping you figure out where you need to abide by eCommerce nexus laws.
Each website we design at Forix is a personalized project. We look at the needs of your business and the needs of your customers and design the perfect experience for everyone. We also look to preserve the vision of your brand throughout all of the elements of your site. If you are looking for a high-quality experience paired with an elegant design that still follows the latest rules and laws for eCommerce retailers, contact Forix today to get started. Our team is standing by to help you get the most out of your website and your eCommerce business.
Streamlined Sales and Use Tax Agreement (SSUTA)
The Streamlined Sales and Use Tax Agreement, known as the SSUTA, is an agreement between 23 states and the District of Columbia that works to make sales tax collection and remittance standardized for online retailers. The SSUTA membership states’ goal is the simplification and standardization of online sales tax codes in order to make it easy for online sellers to comply with online sales tax laws. The SSUTA requires states to adopt a uniform tax base and a simplified tax rate, in order to reduce the burden of tax compliance upon sellers. States with SSUTA membership status have eliminated stacked taxes that come from sales tax levied by local municipalities within a state, instead opting for a singular, easy to apply statewide tax rate that applies to all online sales within that state.
The History of the Case
Let’s go back to the beginning of the story about online sales tax. In 1992, the case of Quill Corp. v. North Dakota ruled that states were not able to collect sales tax from any retail purchases made online, as long as the business did not have a physical presence of a store, warehouse, or employees in that state. The Quill Corporation was an office supply store that was offering it’s licensed computer software for sale online. Because customers were able to order directly from the company online, the sales had completely bypassed North Dakota’s sales tax. North Dakota sought to collect sales tax on any online orders shipped into the state.
If the ruling had passed, the company would have had to pay back taxes for three years of business. The judge ruled in favor of the Dormant Commerce Clause, which at the time said that businesses who sell to customers via the mail are not required to collect sales tax in that state because they do not have physical nexus in the state.
Back in 1992, eCommerce was a completely different animal. Technically, the first eCommerce company was CompuServe, founded in 1969, but the first-ever web browser wasn’t launched until 1990, which gave more people access to eCommerce opportunities. In 1992, Book Stacks Unlimited launched their online platform at www.books.com, creating one of the first online retail stores. Both Amazon and eBay launched their sites in 1995, forever changing the landscape of eCommerce. However, at the time of the case of Quill Corp. v. North Dakota, there were not a lot of eCommerce stores in full operation. The world of online retail was still in the beginning stages, meaning the judges who ruled on the case had no precedent for eCommerce sales tax laws.
Fast forward to the recent case of South Dakota v. Wayfair, filed October 2, 2017. The difference in technological advancements from 1992 to 2017 are vast – and the laws have to transform in keeping with those changes. The state of South Dakota challenged the collection of sales tax from internet retailers who operate in South Dakota with no physical storefront or employees in the state. This was a very similar case to the original Quill Corp. v. North Dakota case, except times have changed, and the internet is now a vastly different place. Many businesses only exist online, selling goods to customers all across the country. In the case of South Dakota v. Wayfair case, the judges overturned the previous ruling of North Dakota v. Quill Corp. Instead, they found businesses who conduct a certain level of sales online have an economic nexus in the state, and must comply with the state’s online sales tax laws.
South Dakota V. Wayfair, Inc: The Final Ruling
The justices ruling on the case attached a few clauses to their ruling in order to prohibit the state from making multiple online sales tax rules and complicating online retail forever. First, they stated that the act will still protect those who do limited business in South Dakota. In other words, the state cannot require a huge amount of online sales tax from retailers who may not center their business in South Dakota, but who do have a few retail customers living in the state who receive goods or products. Second, the state is not able to apply any online sales tax retroactively to businesses who have not been collecting it over the years. This ruling started fresh as of June 2018. Finally, the state must simplify their online sales tax rules, making it easy for online retailers to comply.
The justices wanted to make it clear that this is not a green light for states to start charging online retailers with extra taxes. Rather, it’s a chance for the state to collect a fair amount of online sales tax, just as they would from a retail storefront in the state. The idea is to protect online retailers from complicated eCommerce sales tax laws that would make it impossible to do business, while also to providing the state with the tax revenue that is due from conducting business within state lines.
Most of the justices involved in the case agreed that the previous ruling on Quill Corp. v. North Dakota is no longer relevant, and they are now recommending that Congress fix this discrepancy in the federal online sales tax law. Because of this, we may see a ruling on the federal level regarding the way states collect sales tax online in the very near future.
Ready to Start Collecting Sales Tax on Your Online Sales?
If all of this information seems overwhelming and complicated, don’t despair. In addition to managed services and support, Forix has partnered with tax experts to manage your online sales tax collection and remittance. Falling behind or failing to collect sales tax on online sales is no longer an option, so get in touch with our eCommerce experts today to keep your web store in compliance.