Ecommerce is an international industry — today, it might be the international industry. You can order a product from the other side of the globe and receive it within weeks, often with remarkably-minimal shipping costs. As such, it’s perfect for sellers with shippable products and the desire to take their businesses as far as they can go (both literally and figuratively).
But with international possibilities also come international responsibilities, because every fresh market has new laws and regulations to contend with. The fact that you’re dealing with a more abstract digital landscape doesn’t change that — if anything, it complicates it. And since the USA dominates the field (led by giants such as Amazon and eBay), it’s important to know what US taxation is like for ecommerce sellers.
In this piece, we’re going to cover just that. Here’s what ecommerce merchants need to know about taxes in the US:
They’re determined at the state level
Unlike in many countries, there is no national rate of sales tax in the United States. Instead, each state reaches it own determinations about what merchants should pay. This has naturally resulted in significant disparities between sales tax rates in different states, with richer states (such as California or New York) having relatively large sales tax burdens. The state-led model can of course make it very confusing to determine what exactly needs to be done when selling to multiple regions, as is typically the case for ecommerce.
5 states do not collect sales tax
As of 2018, there are 5 states that do not collect any statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. That said, Alaska and Montana do leave it up to their localities to decide if they wish to collect local sales tax. This was intended to incentivize sellers to set up in those states and sell elsewhere, but this is unlikely to be effective in the long term for a reason we’re about to cover.
They now depend on the vague nexus concept
In 1992, a Supreme Court ruling called Quill v. Heitkamp ruled that online sellers were not required to pay sales tax on purchases made from states in which they lacked physical presence — if a seller did not have a store or a major production, storage or distribution facility in a state, it could offer lower prices to its people through the sales tax exemption.
But that all changed earlier this year when another Supreme Court ruling on case called South Dakota v. Wayfair overturned Quill v. Heitkamp, ruling that the concept of physical nexus (a seller having a physical presence in a state) was no longer fit for purpose in light of the success of the ecommerce model. States are now within their rights to collect sales taxes from merchants lacking physical nexus.
Now, we’re seeing states make efforts to change their sales tax systems to rely on the concept of economic nexus: gauging a seller’s responsibility by the extent and profitability of its sales in a state. In this way, they can try to keep their tax conditions favorable overall while making sure that their taxation systems aren’t circumvented by ecommerce.
Economic nexus will apply to all sellers, national or international
Making things even more confusing, this new power also allows states to seek sales tax from international sellers. While they’re unlikely to push this concept too far (for fear of discouraging imports), they may go after overseas businesses that use American fulfillment systems (such as Amazon’s FBA service) on the basis that it’s tantamount to evading the old physical nexus rule.
Small sellers are likely to struggle by themselves
The long-term implications of the recent ruling are somewhat hazardous to small sellers. Because they’re no longer protected from sales tax demands in states outside of their physical nexus, they are now subject to the ever-changing whims of all the states in which their products are available for order.
Imagine that each of twenty different states decides to run an entirely different system with distinct demands and thresholds — how will small sellers be able to follow the demands, handle the paperwork, and charge the necessary amounts to their customers? Even if they can remain profitable in light of the financial squeezing, they’ll need to stay on top of what could one day amount to fifty separate sets of regulations (or use a service such as Avalara).
This is why we might well see a wave of independent sellers moving towards the safety of established ecommerce platforms with the facilities and automation tools to deal with sales tax requirements on their behalf. For example, they might consider trying to find websites for sale on Exchange, a marketplace specifically for Shopify stores — Shopify has native tax calculation systems that can be extended through add-ons such as TaxJar.
Financial matters already aren’t easy to handle for a small business, and the future of ecommerce regulation seems both confusing and intimidating. Throw in matters such as cryptocurrency and you have a recipe for a headache.
The sales tax situation in the US has been complicated for a long time, and the recent Supreme Court ruling has made it even more so. More than ever, it’s vital to have good financial guidance behind you, so consider getting some assistance if you’re unsure.
Author credit: Patrick Foster is a writer and ecommerce expert from Ecommerce Tips. He covers all the latest and most noteworthy updates in the online retail world to help entrepreneurs stay ahead of the game. Visit the blog ecommercetips.org for some useful tips, and check out his latest posts on Twitter @myecommercetips.