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Small business sales tax – Colorado a cautionary tale

According to the Denver Post, Colorado’s particularly strict law on sales across tax jurisdictions is having a negative effect on eCommerce.

Colorado’s law can be described thus:

Signed by Gov. Jared Polis last week, House Bill 1240 takes effect Saturday. The bill, an updated, baked-into-the-Colorado Revised Statutes version of rules originally rolled out by the Department of Revenue last year, makes destination-based sales tax the law in the state.

That means regardless of where a business is located, if it ships products to another city, county or town in Colorado, it is required to calculate, collect and pay the sales taxes for that jurisdiction. That includes accounting for overlapping boundaries and special taxing districts such as RTD.

Here is one example of what such a thing looks like to a small business:

In April, Hessemer sold a sample-sized product into the self-collecting home-rule town of Winter Park. The sale earned her $1.60 in profit. She owed $1.38 in taxes, but was told she needed to purchase a $60 business license to pay that. Instead, she plans to stop selling in Winter Park, something she considers a loss for her and for eco-conscious customers there.

Ouch!

As I mentioned in our last updates on this topic (here and here), while the solution seems to be set for businesses that sell through third party marketplaces, like eBay and Amazon.com, which now collect sales tax on behalf of their sellers. But the outlook is still ominous for sellers that sell through their own websites, like us.  Like us, many businesses may sell through Amazon.com but are unwilling to put all their eggs in one basket, as Amazon.com has been known to ban sellers or compete with them on a whim.

Colorado isn’t the only state that is making it hard for small businesses.  Kansas seems to stand alone at the moment in having no economic nexus for online sales into the state, meaning, the first dollar you sell into the state requires that you collect sales tax and submit a tax return.  Most other states that have passed legislation requiring online sellers to collect sales tax at least exempt the first $100,000 or more (or a given number of transactions), meaning, you have to sell at least that much before you are required to collect sales tax.

We are still hoping for some kind of a national solution to this problem.  But alas, no further progress on that to date.

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Sales tax, the national solution

We recently learned about a bill by Senators Wyden, Shaheen, Hassan, and Merkley, that would mitigate the online sales tax issue, for a while.  Senate bill S2350 proposes:

Online Sales Simplicity and Small Business Relief Act of 2019 This bill prohibits states from imposing a sales tax collection duty on a remote seller for any sale that occurred prior to June 21, 2018. A “remote seller” is a person without a physical presence in a state who makes a sale in the state. A state may impose a sales tax collection duty on a remote seller only for a sale that occurs after January 1, 2021. In the case of a small business remote seller (no more than $10 million in gross annual receipts in the United States), a state may not impose a sales tax collection duty on any person other than the purchaser if the sale is made (1) on or after June 21, 2018; and (2) before the date that is 30 days after the states develop and Congress approves an interstate compact, applicable to the state and sale, governing the imposition of tax collection duties on remote sellers.

I’m guessing the expiration is just to make it easier to swallow now, so some longer-term debate about the proper way to solve the online sales tax issue for small businesses can happen while small businesses have some protection from abuse by the states.

Introduced in early August, so far this bill has only been “read twice and referred to the Committee on Finance. (on 7/31/2019).”

We can only hope this bill is given some serious consideration.  A moratorium, even a short one, is welcomed at this point.

In the long term, I think some reasonably revenue cap is a good solution to protecting small businesses from significant compliance costs.  Even with a much higher state sales revenue threshold, requiring sellers to monitor sales into every state, and then, on a dime, start collecting sales tax to customers in that state, has serious issues.  From where we sit, the $10 million revenue threshold looks pretty safe, but other businesses may still cry foul.

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Sales tax – eBay will now collects taxes

eBay is the latest selling platform to automatically collect taxes based on the buyers location, and handle filing of returns and submitting payment to the proper tax authorities.  Here is what we received from them today:

While this doesn’t effect us directly (we don’t currently sell on eBay, but many of our parts are sold there by others), we consider it good news that the momentum towards good solutions to the potential for a sales tax apocalypse for small sellers continues to grow.

The biggest worry is still, what happens for sales on our own website.  Simply having to prove that we don’t have to file a sales tax return for even a small percentage of the 10,000+ jurisdictions in the US would make our small business unsustainable.  If any states decide to start bullying small businesses and send out sales tax compliance notices, the onus would then be on us to prove we didn’t have to file a return.

A similar thing happened to us once with our business license.  We had a business license in one town, and our PO box in the neighboring city.  The neighboring city send us a letter demanding that we obtain a business license in their city because we were doing business there.  For those unschooled in the typical rules around business licenses, simply receiving mail in a location is not a such qualifying business activity.  It took two successive responses to get them to give up.  I’ve also seen this for another business, where the state of California demanded the business register in the state and pay the LLC tax, simply because the headquarters of the brokerage company (TD Ameritrade) happened to have a California address.

The general concept is called regulatory overreach, and many states, especially California are not shy about doing it.

So we continue to wait and hope that a well crafted and thorough solution comes along that will reduce the fear of a huge tax compliance burden for independent sales that don’t go through a third party marketplace.  Otherwise, there will only be third party marketplaces left to rule the roost.

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More progress on the sales tax situation

It looks like more states have passed legislation mandating marketplaces like Amazon to collect taxes, and submit returns, on behalf of third party sellers.   Here is what we just received from them:

Dear seller,

Based on changes to Arizona, California, Colorado, Maine, Maryland, Massachusetts, Nevada, North Dakota, Texas, and Utah States tax laws, Amazon will begin calculating, collecting, and remitting sales and use tax for all orders shipped to customers in these states on October 1, 2019.

Your existing tax calculation settings, order details, and payments reporting will update automatically to reflect this change. Changes to your tax settings or seller account are not required based on the state law changes. However, you may consider working with your tax advisor to determine if your business has any other ongoing tax remittance or reporting obligations.

Answers to common questions are available in the Marketplace Tax Collection FAQ.

For more information from Amazon or links to each state resource, see Marketplace Tax Collection FAQ

Thank you for selling on Amazon.

Regards,
Amazon Services

Since that now includes our home state, California, that is a relief.  I imagine now it won’t be long until all states require this.

But is still leaves us open to abuse from state tax authorities for sales through our website.  We still await a solution to that problem.

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Sales tax fiasco update

If you read our blog, you know that the sales tax landscape changed dramatically in 2018 due to the Wayfair v South Dakota ruling.  Earlier this year, with no legislative mitigation on the horizon, we started thinking of this as a potential show stopper for businesses like ours; the complexity of filing hundreds or thousands of sales tax returns could easily make a business like ours not feasible.

Last month, we saw some progress as Colorado passed a law that transferred tax responsibility to third party marketplaces like Amazon.com, for independent sellers that use them.

We’ve seen some additional movement on this issue, some good, some bad.

From a recent article in the Wall Street Journal:

But states have since enacted disparate rules, which as we warned are straining small business. As a case in point, the Kansas Department of Revenue will now require all out-of-state retailers to collect sales tax no matter how much business they do in the state. This includes college students selling used textbooks on eBay and retirees hawking a few hand-made greeting cards on Etsy .

While the lack of a small-business exception can be attributed to partisan politics, this still leaves small businesses like ours exposed to harassment.

While most states have adopted South Dakota’s $100,000 small-business exception, they haven’t adjusted the sales threshold to their population size. This isn’t surprising since the Court didn’t demand it, and most construed South Dakota’s thresholds as a safe harbor.

But a $100,000 sales exemption in South Dakota with a population of 880,000 would be equivalent to more than $1 million in larger states like Illinois, Michigan and Pennsylvania. In California it would be roughly $4.5 million, nearly 10 times higher than the $500,000 exemption the state has set. A small vintner or craftsman could easily exceed these thresholds.

This makes a very good point that I haven’t seen discussed yet.  The $100,000 / 200 transaction threshold seems to have been adopted across the board.  For a business like ours whose average sale price is low, 200 transactions amounts to about $2,500 in sales.

Some states like Arkansas, Colorado and Illinois exclude “marketplace” sales on sites like Amazon and eBay from their thresholds for individual sellers, but many do not. And some states require marketplaces to collect sales tax for third-party retailers. The upshot is that a retailer who sells on eBay, Shopify and Amazon will exceed different state thresholds at different times.

Which raises the issue of when sellers must register with states. In many states, retailers must register immediately after they exceed the sales threshold. But Tennessee says sellers must register the first day of the third month following the month in which the dealer met the threshold, but no earlier than July 1, 2017.

What a mess!  A small business like ours is responsible for being aware of all the rules; we don’t get an exception for ignorance.  For example, California’s approach:

Consider California, which in June required Amazon third-party merchants to pay up to three years of back taxes. Democrats claimed they were being gracious by not requiring more.

On the more positive side, we got an email from Amazon.com recently, the first that actually provides some useful information about their sales tax system and practices.

23 states have passed legislation that transfers the tax responsibility from you to Amazon for the products that you sell in Amazon’s store. In these 23 states, Amazon calculates, collects, and remits tax. Amazon’s tax collection in these states is based strictly on state legislation and there is currently no option for selling partners to opt-out. On July 1, 2019, based on changes to Arkansas, Indiana, Kentucky, New Mexico, Rhode Island, Virginia, West Virginia, and Wyoming State tax laws, Amazon began calculating, collecting, and remitting sales and use tax for all orders shipped to customers in these eight states. Beginning September 1, Ohio will also join the mix.
Marketplace Tax Collection States
State Effective Date
Arkansas July 1, 2019
Indiana July 1, 2019
Kentucky July 1, 2019
New Mexico July 1, 2019
Rhode Island July 1, 2019
Virginia July 1, 2019
West Virginia July 1, 2019
Wyoming July 1, 2019
Vermont June 6, 2019
Idaho July 1, 2019
New York July 1, 2019
South Carolina April 29, 2019
Nebraska April 1, 2019
District of Columbia April 1, 2019
South Dakota March 1, 2019
Alabama January 1, 2019
Iowa January 1, 2019
Connecticut December 1, 2018
New Jersey November 1, 2018
Minnesota October 1, 2018
Oklahoma July 1, 2018
Pennsylvania April 1, 2018
Washington January 1, 2018

It’s a good start, but, it is only 23 out of 50 states, which means we are still responsible for the other 27 states.

Furthermore, we are still responsible for being aware of individual state policies, tracking sales to individual states, implementing potentially hundreds or thousands specific tax jurisdiction sales tax collection rates, and potentially submitting multiple returns to individual states with complex calculations for sales taxes that are due in individual jurisdictions.

While about 2/3 of our sales go through Amazon now, retaining a sales channel independent of any 3rd party merchant is important for independence, and the off-chance that they arbitrarily decide to suspend our account.   The danger is that if marketplaces like Amazon.com take responsibility for collecting sales tax and filing returns, while the states don’t figure out a streamlined system for independent merchants, it could further tip the scales away from independent sellers and give more power to sellers like Amazon.com, some that few would argue is a desirable outcome.

I hope the states and federal government get off their collective duff and create a solution to this problem soon.

 

 

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