This year, the United States Supreme Court ruled that states are allowed to require online merchants to collect state sales taxes from their customers. While shoppers may complain about the fact that they’re going to have to pay more for the things they buy online from now on, this decision is going to have an even bigger impact on businesses and individuals who sell their products over the Internet.
The court decision upheld a South Dakota law that imposed sales taxes on Internet retailers. While South Dakota’s law contains an exemption for low-volume retailers, not every state law may do the same. Even if you’re just running a small Etsy storefront, you should anticipate paying sales taxes to whichever states you have customers in, and you’re going to need to start charging sales taxes to those customers.
It’s always worth taking the time and effort to make sure you’re handling your tax matters properly, especially if it’s a new tax obligation you’re not familiar with. States are going to be eager to collect those taxes they’re owed now, so here’s what you need to know to get your online store in compliance with the new sales tax ruling.
In the past, you only had to pay sales taxes to states in which your business had a physical presence. That meant online-only merchants only had to collect and pay sales taxes from their home state.
The new ruling means that any state can make a law requiring you to pay their sales tax. In the months ahead, you can expect many states to enact Internet sales tax laws to get this revenue stream flowing.
One of the biggest challenges for merchants who aren’t used to collecting out-of-state sales taxes will be calculating and charging the correct amounts. Every state has different sales tax rates, and rates can vary within states according to local laws and regulations. The last thing you want to do is alienate a customer by overcharging them for sales tax, but if you undercharge, the difference will come out of your profits when it’s time to pay each state.
The good news is that many point-of-sales systems and payment processing platforms will be fully equipped with features to help you calculate the correct, up-to-date sales tax amounts on every transaction you make. However, if you’re a running a small operation like eBay or Etsy sales, it may not be cost effective to invest in that type of software. In that case, you may need to take the time to research and calculate the right sales tax charge when you receive an out-of-state order.
If you’re not sure if your retail business is big enough to be subject to new sales tax laws, you can use the South Dakota law as a guideline. Their threshold is $100,000 in sales or 200 transactions per year, but other states may end up adopting completely different requirements. If you’re well below the minimum amounts specified by the South Dakota law, you might not need to implement new sales tax collection policies right away, but you should be prepared for the possibility.
Don’t Be Afraid to Seek Help with Filings
Remember, collecting sales tax from your customers is only half of the process. You also need to file and remit state taxes, which means you need to know the reporting periods and due dates for every state you’re doing business in.
Even if you haven’t collected any taxes within a given reporting period, you may still be required by law to file. This can get complicated—and overwhelming—pretty quickly. It might make good sense to hire tax professionals to make sure your reports and filings are done right.
Don’t Sweat The Inevitable
If you’re not sure where you stand yet, you’re not alone, and you shouldn’t panic.
The best thing to do when you’re not sure what you’re obligated to collect, report, and remit is to keep complete, meticulous records of your transactions. That way, if you find out later you haven’t been following the correct procedure, you’ll have all the information you need to make a late or corrected filing and get back on track.
Many analysts are rightly concerned about the impact this Supreme Court decision is going to have on small businesses. But, these changes have been a long time coming, since the old laws that exempted online retailers from collecting sales tax were mostly based on cases involving mail-order catalog companies that were operating at a completely different scale than today’s ecommerce industry.
Be prepared and be willing to look for expert help when you need it, and your Internet store will be able to weather the coming sales tax storm just fine.