For years, many e-commerce transactions have been conducted without the imposition of sales tax. A recent U.S. Supreme Court decision, however, might change that. In South Dakota v. Wayfair, the justices ruled that states can require e-commerce retailers to collect taxes on sales made within them, even if the retailer has no physical presence there.
As states react to this ruling, each will most likely decide its own revenue threshold for sales tax collection. In South Dakota, where the case originated, the current law requires merchants to collect a sales tax only if they conduct more than $100,000 in annual sales or complete a total of 200 transactions, which will have the biggest impact on a fairly specific cross-section of retailers.
Many of the biggest e-commerce retailers like Amazon or Chewy were already paying sales tax in states where they had established brick-and-mortar locations, sales teams, or warehouses as part of a distribution network. As a result, the companies most affected by the new regulations will be the ones that barely cross the sales threshold. South Dakota set the bar at $100,000, but the amount will most likely vary from state to state.
The impact of the new sales tax law won’t only be felt in terms of prices to the consumer. Think about the time it takes to do your taxes, and then imagine having to do them in every single state. Now imagine doing them in every state four times a year when the tax rate might differ depending on the product category. Businesses have to pay sales tax on a quarterly basis in some states, meaning calculating the tax owed to each state government, filing, and remitting will be a very labor-intensive proposition.
To ensure that the new laws don’t bury your direct-to-consumer subscription business in the accounting books, follow these four steps:
1. Keep yourself informed
An important part of the Tax Cuts and Jobs Act is the stipulation that states must make decisions on certain tax policy issues for themselves. As new laws are created, they’ll hopefully make things simpler, but it’s important to stay on top of your tax burden regardless. When it comes to unpaid taxes, ignorance will never be an acceptable excuse.
2. Invest in technology
Updating your technology provides some of the best returns on an investment that you can make because it can help you solve several major pain points, from collecting up-to-date and accurate customer data to successful recurring billing and more. This benefit is especially true when it’s time to do your taxes. A solution such as Avalara for your e-commerce store will help you accurately determine your tax burden and charge for it, ensuring that you don’t come up short when it’s time to make tax payments.
3. Pay your taxes.
Since 2013, state officials in Ohio have suspended 700 businesses after their owners failed to pay sales tax for two consecutive months. As many as three-quarters of the owners paid these taxes on the first day of suspension, illustrating that they could’ve paid them ahead of time to keep their doors open without interruption. Know what you owe and pay it on time to prevent this from happening to you.
4. Speak with a specialist.
No one will have more experience than someone who specializes in the direct-to-consumer space. Not only will an expert be able to help you with regard to new sales tax laws, but they’ll be able to guide your entire subscription strategy in a way that achieves your goals. Subscription businesses are an extremely complex equation, and a specialist will help you avoid mistakes that are easy to make.
Sales tax changes take time to go into full effect, but many kicked in Oct. 1. Whenever sweeping tax changes are introduced into an industry, strategies will need to be altered and updated to take the new rules into account. Those who get a head start will inevitably come out on top.
OceanX provides a subscription and e-commerce platform.Favorite