As the new coronavirus disrupts markets and supply chains, it’s also adding a new layer of concerns for online B2B as well as B2C sellers on top of an already complex set of tax-collection rules across the 45 states plus the District of Columbia that levy sales tax.
“Figuring out each state approach is a major administrative effort,” says Rebecca Newton-Clarke, a senior editor at Checkpoint Catalyst, a tax law publication of the Thomson Reuters Tax & Accounting unit of Thomson Reuters Corp.
Two common areas of confusion are in online marketplace sales and in the sales thresholds for requiring sales tax collection, which can vary widely among states. And with many online sellers developing new product offers and sales strategies as a result of the coronavirus pandemic, they may unwittingly take on tax responsibilities they hadn’t encountered before, Newton-Clarke says.
Most states are now requiring marketplace operators, or “facilitators,” such as Amazon.com Inc. to collect the sales tax for goods sold by third-party sellers on their online marketplaces.
But the state rules for marketplaces as well as for individual sellers vary based on sales volume thresholds. Plus, these thresholds can differ from state to state based on such criteria as dollar value, number of transactions and the use of third-party order-and-delivery apps used in forwarding and fulfilling online orders.
● Gross receipts threshold:
Many states base sales-tax collection responsibility on the gross value of a seller’s annual receipts, even though the actual sales volume that a company must collect sales tax on can be far less.
For example, say a manufacturer sells into a state with a $100,000 sales volume threshold for setting tax-collection responsibility and has gross receipts for a year of $150,000. That would require the manufacturer to collect sales tax, but only on transactions that were not tax-exempt. If the $150,000 in sales volume included $120,000 in sales to tax-exempt organizations or to retailers who pass the sales tax onto consumers, the manufacturer would only have to collect tax on the remaining $30,000. “You really have to do your homework,” Newton-Clarke says.
● Third-party marketplace sales:
Some states include a seller’s sales through third-party marketplaces toward their total volume for determining responsibility to collect sales tax. Texas, for example, started such a system as of April 1, 2020. Its threshold for tax-collection responsibility is $500,000 in total in-Texas sales; if an independent seller does $200,000 of those annual sales through a third-party marketplace and $300,000 through its own website, it has to collect sales tax only on the latter. The marketplace operator, or “facilitator,” collects tax on the other $200,000, assuming it meets the $500,000 sales threshold in total marketplace sales.
● Sales volume by monetary value or number of transactions:
In many states, the requirement to collect and remit sales tax starts with a minimum annual sales volume of $100,000, but in some states, including Texas and California, the annual minimum sales volume is $500,000.
And there are other nuances to consider.
Some states set a threshold based on the number of sales transactions, which can result in confusion or surprises for some sellers, Newton-Clarke says. For instance, if an online seller recently began selling higher volumes of small containers of rubbing alcohol because of a sudden demand during the coronavirus, it may not realize it has surpassed a 200-transaction threshold in a state it recently began selling into. “It’s anticipated that many states will get rid of the transaction threshold, but it can be a real trap for the unwary,” she says.
● Sales of cloud technology and digital products:
“Some states tax these transactions broadly, some tax only a handful,” Newton-Clarke says. “Some states might tax digital products like audiobooks, music and movies, but not cloud-computing transactions. While there’s a lack of clear directions from many states, “the tendency is for states to tax more of these items.”
She adds that in states where cloud-computing transactions are subject to sales tax, the value of such transactions may be counted toward a gross-receipts threshold that requires a seller to collect tax on other taxable items.
● The role of third-party order-and-delivery apps:
With the rise in the use of mobile apps for placing online orders and requesting delivery, it’s often unclear under state rules whether a third-party app provider or the provider of the ordered food or other items is responsible for collecting sales tax, Newton-Clarke says. “There’s not a lot of guidance yet,” she says, adding, “Some restaurants have their own food-delivery systems, so it can be a real administrative headache.”
One of the reasons for the laws, experts say, is to enable states to collect sales tax for a marketplace’s overall sales; without the facilitator laws, states would be hard-pressed to collect sales tax from the many small sellers on marketplaces whose annual sales don’t reach the minimum annual sales threshold that triggers sales collection duties for individual sellers.
Economic nexus and business income tax
Of the 45 states plus the District of Columbia that have a statewide sales tax, only two—Florida and Missouri—don’t require online sellers based outside of their states to collect sales tax unless they have a physical in-state presence, or nexus. But Florida and Missouri each have pending legislation that would require tax collection without a physical presence; tax analysts say they expect each state to pass and enact those bills.
The five states with no statewide sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon. Alaska, however, does have local taxing jurisdictions that impose sales tax.
Some states have joined the federal Internal Revenue Service in extending income tax deadlines into late spring or summer. Although many states have kept the same sales-tax schedules, the possibility of a sales-tax-like nexus for income tax has become something to consider, Newton-Clarke says.
When the U.S. Supreme Court ruled in 2018 that states could require online sellers to collect sales tax regardless of whether they have an in-state physical presence, or economic nexus, the ruling focused only on sales tax but also kicked off new interest in setting new rules for business income tax. “The Wayfair case is a sales tax case, but it answered the question of whether economic nexus is acceptable,” Newton-Clarke says.
Hawaii, for example, as of Jan. 1 subjects out-of-state companies to business income tax on in-state sales if they hit the thresholds of either 200 or more business transactions or more than $100,000 in gross sales. Washington State also kicked off on Jan. 1 a $100,000 sales threshold for out-of-state sellers subject to its business and occupation tax.
“There are a lot of indications that states will assert economic nexus for income taxes more aggressively,” Newton-Clarke says.
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