Few things have changed the way people shop more than the internet. Today, about eight in 10 Americans turn to their computers or phones rather than brick-and-mortar stores for purchases. According to the Washington Post, people buy something online about as often as they take out the trash — at least once per week.
That can be a game-changer for small businesses. With the availability of ecommerce, businesses — no matter the size or industry — can reach customers around the country.
However, a June 2018 Supreme Court decision is about bring some big new challenges to small businesses that sell online. In South Dakota v. Wayfair, the Court ruled that states can now require merchants to collect sales taxes on online purchases. The ruling overturns a 1992 decision in Quill Corp v. North Dakota, which found that states could not require retailers to collect sales taxes unless they had a physical presence — a store, plant, or other facility — in the same state where the buyer is located.
Bottom line: Now, states can require that small businesses charge and remit sales tax on an item that is purchased online and shipped to that state. Here’s what that could mean for your small business.
For big businesses with large accounting departments, this ruling could mean little more than some additional paperwork and tax filing requirements. However, for small businesses with limited staff and resources, these new requirements may be daunting. As these new tax requirements go into effect, businesses may be required to:
Track the sales tax rates and requirements of various states.
Calculate and apply the appropriate tax on each online purchase according to the state where it will be shipped.
Send monthly sales tax payments to each state where the business made sales.
File the appropriate tax forms for each state where sales were made and sales tax sent.
And, don’t forget that some states don’t have sales tax at all, while others have use tax, which is the buyer’s responsibility to calculate and pay. And some states may also apply thresholds that exempt small businesses from having to report and collect sales tax.
In short, selling online may soon become a logistical nightmare for small businesses.
The Good News
Before you start shutting down your company’s e-commerce function, take heart: There are some good news and solutions to make selling online easier as the new tax requirements come into effect.
First, just nine states — Georgia, Tennessee, Indiana, Wyoming, Colorado, Alabama, Massachusetts, North Dakota, and South Dakota — have current online sales tax laws. Six more, including Illinois, Iowa, Connecticut, Hawaii, Kentucky, and Vermont, have enacted laws that will go into effect in January 2019, according to a June 2018 report in Digital Commerce 360. And, so far, these states have a minimum threshold of $100,000 in sales or 200 transactions before a business is required to collect and remit sales tax.
So, depending on where you make sales (and the volume of sales you make), you may not be impacted as much as you expected.
The Next Steps
Still, it’s essential to stay ahead of the curve when it comes to sales tax calculations. Small businesses should:
Track revenue at least weekly and keep accurate records. This will allow you to spot whether you’re close to meeting the thresholds for sales tax remittance in the states that require it.
Establish a monthly process for calculating and tracking sales tax. Make sure you file the appropriate forms and remit payment by the required deadline in each state.
Appoint one person to spearhead sales tax tracking and remittance to ensure that you’re aware of when payments are due and how much your business owes.
The new sales tax requirements that stem from the Supreme Court decision, will certainly require some adjustment and new procedures in the way many small businesses track and pay their taxes. However, since the thresholds require a substantial amount of sales in each state where taxes are due, not all small businesses will be affected.
If you’re still confused about these changes, Bookkeeping Express can help. From helping you track sales in various states to finding new ways to streamline bookkeeping processes, we can help you solve this and many other tax problems. To learn more, reach out and put our team of experts today.