May 26, 1992 was a big day for eCommerce—even though online commerce was basically non-existent at that time.
On May 26, 1992, the Supreme Court decided its ruling for the Quill Corp. v. North Dakota court case. The Supreme Court ruled that the state of North Dakota couldn’t impose a sales tax on Quill because, although they had an online inventory and fulfilled mail-in orders to North Dakota, the company had no physical presence in the state.
This Supreme Court decision set up what has essentially become a nearly 25-year sales tax exemption for eCommerce companies. While the quarter century has been profitable for online retailers, booming eCommerce revenue is leaving states to put pressure on the long-standing Quill Corp. v. North Dakota ruling.
2017 could mark the beginning of the digital sales tax era—are you ready to comply with these complicated tax laws?
States Starting to Demand Sales Taxes on Most Online Orders
In March 2015, states saw a glimmer of hope in their chances to collect online sales taxes. In his opinion on Direct Mktg. Ass’n v. Brohl, Supreme Court Justice Kennedy noted that it’s time to overturn Quill Corp. v. North Dakota—though he admitted it would be a tall task.
As we said, the problem is that the 1992 ruling came at a time when eCommerce basically didn’t exist. Instead, the ruling was concerned with out-of-state catalog sales and mail-order commerce.
Seeing this discrepancy, states have started to impose their own rules and regulations regarding online sales taxes. Two of the most notable include:
- South Dakota: When Governor Dennis Daugaard signed SB 106, he imposed a regulation that ignores physical presence as a means of enforcing state sales tax. Instead, companies must collect sales tax if, in the previous calendar year, the seller’s sales to South Dakota exceeded $100,000 or it made 200 or more transactions. The state has already sued retailers who haven’t complied.
- Alabama: In an effort to impose sales taxes, Alabama released a statute to specify what it means to have “physical presence” in the state. There are a number of specific rules, but the general idea is that the state can force sales tax collection if remote entities are closely linked to Alabama in some way.
These are just two examples of what seems to be inevitable—online sales taxes are coming. Unfortunately, compliance won’t be as simple as it is for a simple brick-and-mortar retailer.
If you haven’t yet prepared for sales tax for your online store compliance, there are multiple challenges you must overcome.
4 Challenges for Online Sales Tax Compliance
Tax compliance is a fact of life for retailers, so at first glance it might seem like adding tax regulations for items sold online to the mix wouldn’t be a big deal. However, there’s a whole different world of complications when it comes to applying sales taxes to eCommerce sales.
There are so many different tax compliance challenges facing eCommerce companies. But as you deal with digital sales taxes, your problems will likely come down to the following questions:
- How Many Tax Codes Do I Have to Know? The benefit of a small brick-and-mortar store is that it is subject to 1 sales tax. However, your eCommerce site likely sells to a number of different locations. There are over 12,000 tax jurisdictions in the United States alone—you will have to comply with them all when sales taxes for online stores are enforced nationally.
- What Objects Are Taxable? You won’t find a tax jurisdiction in which the sales tax applies universally to all products. Instead, state and local governments have implemented so many exemptions, exclusions and deductions that it can be almost impossible to manually determine which items to tax. Not to mention the issue of managing tax certificates for these exemptions, exclusions and deductions.
- Which Rate Do I Apply? You have to go beyond simply asking whether an item is taxable or not. Policy makers and political influencers have also created special rates for certain goods. In addition to special rates, location-based data is growing increasingly specific so simply collected zip codes and apply sales taxes won’t be enough moving forward.
- Am I Recording/Reporting Correctly? Up to this point, it’s been possible for eCommerce companies to manually manage tax compliance—there just wasn’t much volume when it came to sales taxes on the internet. However, as digital sales taxes become more mainstream, you must ensure you have the systems and processes in place to properly record and report compliance.
The honeymoon period for eCommerce is over—states want to collect their sales taxes and they are making increasingly compelling cases to do so. Compliance is a requirement and the costs of failure could be significant if you’re not prepared.
Properly implementing such a complicated schematic to apply these new tax rules will prove challenging for even the most experienced eCommerce companies. Non-compliance is a problem, but you’ll also face challenges as online sales taxes cause customer experience (CX) friction.