Electronic commerce (e-Commerce) has massively exploded in magnitude and importance over the past 20 years. It is now a mainstay of most service industries including groceries, transportation, publishing, and even waste management. Defined primarily as the sale or purchase of goods or services over computer networks, it can be further divided into other channels: business to business (B2B), business-to-consumer (B2C), and consumer to consumer (C2C).
e-Commerce is a business tool, sales facilitator, and source of employment for many. It was inevitable that state governments would tax these businesses as they do others. While all retail sales are legally subject to sales taxes, many online shoppers don’t pay what they owe. They are either unwilling, ignorant, or unaware of this responsibility.
Recently, Georgia (followed by several other states) passed new sales tax legislation regarding e-commerce purchases, and sellers are scrambling to adjust.
e-Commerce and Sales Tax
Sales tax is a small percentage of the sale of a product or service that is added to the total sale by the retailer and is paid by the consumer. Online retailers are supposed to collect this amount, declare it and pay it to the state. In fact, sales tax accounts for over 30-percent of state tax revenue.
States use sales tax to pay for annually budgeted items like schools, hospitals, roads, and public safety. With the rapid growth of e-commerce, states have been deprived of revenue from online sales. The revenue of which could be used for education, infrastructure projects, or address to state budget shortcomings.
Sales tax protocols and rules may differ to a considerable degree from state to state, and not all actually have sales tax. Alaska, Delaware, New Hampshire, and Oregon have limited or no sales tax requirements. Some states exempt food and prescription drugs, while others charge far lesser for sales tax on food items. Other states impose no sales tax on clothes below a certain price range. Buyers and sellers occasionally take advantage of these discrepancies.
The New E-Commerce Sales Tax Legislation
In May 2018, Georgia State Legislature passed an economic nexus measure that requires out-of-state sellers to collect and remit Georgia sales and use tax. This legislation broke the legal precedent that only collected tax from companies with an in-state physical presence. In addition the Georgia law requires compliance with their tax reporting requirements.
So, why was this law enacted?
In a fast-moving digital world, the physical presence standard seems outdated and impractical in a billion-dollar industry. It was argued that small businesses faced an unfair disadvantage when online retailers didn’t remit sales tax. Georgia estimated potential losses of sales tax revenue of about 5-billion dollars from taxable online sales.
This decision could lead to an influx of sales tax revenue for the state resulting in a more durable revenue system. Georgia decided to be one step ahead of the House 61 Bill. Despite initial lawsuits and criticisms, the law is anticipated to go into effect January, 2019.
It is likely to result in similar legislation in other states, as well.
In addition to Georgia, states like Arkansas, California, Connecticut, Illinois, Kansas, Minnesota, North Carolina, New York, Rhode Island, and Vermont are developing tougher legislations into effect.
Concerns of Sellers, Consumers, and Possibly the Supreme Court
Virtual sellers who make at least $250,000 in sales or 200 individual sales a year must remit sales taxes to the state of Georgia. This could have negative effects on profit margins from online sales. Businesses and consumers always adjust when tax rates become somewhat prohibitive but this is an extra hurdle for companies handling online transactions.
The biggest issue many electronic vendors are citing is the lack of a consistent tax levy across states, as different states have different tax bodies, bases, and regulations. In addition, customer privacy may be violated as the state may require a copy of each of the purchaser’s sales and use tax statements.
Therefore, the Supreme Court is considering leveling the playing field to create a consistent tax environment like the European Union.
What Can e-Sellers Do to Prepare for This Change?
There are several things that e-Sellers can do in order to prepare for impending changes in state sales taxes. First, they should verify whether their products and catalogue are taxable, and then choose which states to have a tax nexus in. Then, they should obtain appropriate sales tax permits and certificates, and look into the tax rates.
Sellers should find out if they need to submit annual reports to purchasers and state bodies. Using automated APIs, plugins, and solutions for processing tax calculations, reporting, and sales is a good idea. Using analytics to analyze their potential sales tax liability provides a better understanding of tax implications of their business decisions. Getting legal tax help early to integrate tax data and documentation would be beneficial.
Internet-based sales need to be treated as any other retail transactions. Otherwise it is unfair to the folks who sell their products in brick and mortar stores. They end up suffering from price discrimination. It’s also unfair to law-abiding taxpayers, since it reduces the amount of state sales tax collected by an increasing amount, as the digital landscape grows annually. Although it will be a temporary inconvenience, as any major change usually is, eventually it will be as common as paying any other taxes.