Gosh, that title is a mouthful, isn’t it? As I’ve mentioned before, I’ve spent several weeks trying to wrap my brain around the Gordian Knot that is sales tax law in the US.
Ugh. I’m years late to the internet sales party and now it’s all just a big headache. In a nutshell, here’s what happened to make selling online using Etsy or Amazon a giant pain the *ss these days:
South Dakota vs. Wayfair – this case went to the Supreme Court and they ruled that SD could require online businesses to collect sales tax under certain conditions. (I’m simplifying this a LOT, so feel free to fall down the internet rabbit hole about this court case yourself.) Of course, once South Dakota got the green light to collect sales tax on internet sales, which up to this point had generally been exempt from that, all the states wanted their piece of the sales tax pie.
Disclaimer: I am not a lawyer, a legal person, a CPA, or in any way qualified to give you advice about sales taxes and sales tax law. I am just explaining to you MY understanding of how things will work moving forward, which admittedly, could be wrong.
Wild West Internet
Ok, with that out of the way, let me explain a few things. In the olden days of the internet, because states didn’t realize internet sales/business would be a thing, they didn’t address the issue of taxes on those sales. It was assumed that, for the most part, sales your business made would be to people who also lived in your state. So it was the Wild West of the internet – set up, sell, collect moolah. Of course, the state where you lived had laws you needed to follow about sales tax for sales in your state, but everything else – other states, other countries – were fair game.
Most states’ sales tax laws had to do with sales in THAT state and didn’t address the issue of sales that happened out of state. Sales tax was collected based on the location of the seller – i.e. the state where the online seller lived, not where the buyer lived.
(SIDE NOTE: Most states do address ‘use tax’ – essentially sales tax that people were supposed to pay on items they purchased out of state to use. Those are supposed to be reported on your yearly taxes – but most people didn’t, so the states lost out on that money.)
Also, since states could all make up their own laws about taxes, they vary widely. Some states tax food sales, others don’t. Some states don’t have sales tax at all. Some states tax digital products – like digital images or computer software. Some don’t. Most states that DO charge a sales tax have different tax rates depending on where in the state you make your purchase – cities and counties can add on to the state sales tax rate, so the rate isn’t the same everywhere.
For instance, the state sales tax rate in the state where I live is 6.5%. But it can range from that 6.5% all the way to 10.475% (which it does, in one city). Every single city and county in the state can decide to charge sales tax, and that can change the rate. So keeping up with all the different rates can be a paperwork nightmare.
Enter things like Etsy and Amazon and Ebay -people could sell online and not have to worry about things like pesky sales tax. It was like having a ready-made store – just set up and go. You only really had to worry about the sales tax for your state of residence. Because it was so easy to set up a store and start selling, places like Amazon and Etsy and Ebay became very popular. So, of course, states wanted a share of all the money changing hands.
South Dakota vs. Wayfair
The problem was that most sales tax laws said that sellers/businesses had to have a ‘nexus’ in the state,which used to be met in the following ways:
- If the business had a physical location in the state
- If there were resident employees working in the state
- If the business had property (including intangible property) in the state
- If there were employees who regularly solicit business in the state (i.e., salespeople)
Most sales tax laws were made when internet shops didn’t exist. Since there is no ‘physical’ location, sales tax laws didn’t apply. And that was how things mostly went until the SD vs. Wayfair case. Essentially, the Supreme Court decided that the states could require sellers/businesses to collect sales tax if they had ‘nexus’ in the state, but they made some changes to the definition.
Now there are additional types of ‘nexus’ for ‘remote sellers’ – i.e. internet businesses. (Don’t you just love all the new terms we’re learning?) Those include click-through, affiliate, economic, and marketplace. If your online business falls under one of those new umbrellas, you could be liable for collecting sales tax – in every state where you have sales, not just the one you reside in. Also, many of the new sales tax laws specifically state that the sales tax must be collected based on the location of the buyer, NOT the seller, which is not how it used to be done.
Once South Dakota got the green light, states began passing their own sales tax laws to address online sales. (You can find all kinds of information on these over at the Sales Tax Institute.)
Piece of the Pie
States knew that going after all the mom-and-pop internet shops would not be popular, so most states also included a ‘safe harbor’ or ‘small seller exception’ for those mom-and-pop internet shops. Modeling their new sales tax laws after South Dakota, most of the new laws have a clause that if an online business makes under a certain $ amount in sales, or under a certain number of transactions (or sometimes both), the business is exempt from having to collect sales tax.
Because of the complexity of many states’ sales tax rates, asking a small business to correctly collect from and remit sales tax to 50 different states, and potentially thousands of localities, is a huge burden on those small businesses. Indeed, if every online business, no matter its size, was required to do this, a huge percentage would likely close overnight. It’s simply too much work for it to be feasible for small businesses to do this.
Of course, states aren’t dumb. They want the most money for the least amount of effort. So they aimed for the big guys. If they could require the big businesses to collect sales tax, it would net them more money. Enter ‘Marketplace Facilitator’ clauses.
Requiring big online sales giants like Amazon and Etsy to collect sales tax could net the states a ton of money. Those big businesses have the resources to collect and remit sales tax – so the states get more money, and most of the work falls on the shoulders of these big platforms – now referred to as ‘Marketplace Facilitators.’ There are lots of ins-and-outs of these provisions – including things like whether or not Amazon (or other Marketplace Facilitator) has a warehouse in your state, that can determine whether a business has to collect sales tax.
Etsy now collects and remits sales tax on sales in 34 states (as of Oct 1, 2019). There are currently 5 states that do not charge sales tax – Alaska, Oregon, New Hampshire, Delaware, and Montana. And many states have new laws in the works. Alaska, for example, does not charge a state sales tax, but cities are free to charge sales tax if they wish, and some may.
What does it mean?
All these changes mean that if you want to sell on Etsy or Amazon or anything that could be deemed a ‘Marketplace Facilitator,’ you’ll need to know about sales tax and what the requirements are – in every state, not just the one you live in. And even if Etsy or some other Marketplace Facilitator collects and remits sales tax to a state for you, you may still be required to file sales tax with that state.
Let’s look at some examples. (Again, these are based on MY understanding of these convoluted laws, so I could be wrong – do your homework!)
Example 1: Let’s say you live in Delaware and open a store on Etsy. Your state doesn’t charge sales tax, so you’re golden, right? Only if all your sales are to other people in Delaware. If you sell something to someone in Nebraska, Etsy will collect sales tax on the sale and remit that tax to Nebraska. Cool, so you’re still golden, right? Nope. Nebraska’s sales tax law requires you to register with their state, even though Etsy collects and remits the sales tax for you.
Example 2: You live in Kansas and open an Etsy store selling digital downloads. Kansas exempts digital products from sales tax, so you don’t need to worry about sales tax, right? Again, only if your sales are all to other people who live in Kansas. If you sell a digital download to someone who lives in say, Arkansas, what happens? Etsy will collect and remit the sales tax to Arkansas. Do you need to do anything else? Nope – Arkansas does not require remote sellers (that’s you) to register if a Marketplace Facilitator (that’s Etsy) is collecting and remitting the sales tax.
Example 3: You live in Maine and you open an Etsy store. You’ve already registered with Maine for sales tax purposes. You know that Maine requires Etsy to collect and remit sales tax for sale in Maine. So you don’t need to do anything, right? Maybe? You need to be familiar with the sales tax laws of the state you reside in – there are many different laws and items that are exempt in one place may not be in another. What do you do if your product is exempt from sales tax, but Etsy collects it anyway? What if you make a sale through Etsy to someone in New Mexico? Etsy will collect and remit the sales tax, but New Mexico still requires the remote seller register and file sales tax – though you can take a deduction for sales tax collected by a Marketplace Facilitator.
Starting to understand the headache?
Marketplace Facilitator vs. Website
I’m now wondering if it would be easier to just open my own little online business. Yes, there are pros and cons, but given all the new headaches with sales taxes, with many more changes likely coming down the pike, it seems like a lot of unnecessary (and unwanted) work.
Because states know it’s a huge headache, some states have banded together and created the Streamlined Sales and Use Tax Agreement (SSUTA). Basically, you register with SSUTA and are registered with all member states at once, which is currently 23 states (as of this writing).
Given how poorly some government agencies are at securing my information, I don’t know if I’m comfortable handing over my SSN or Business Tax ID to 23 states to lose. Or perhaps more, if I opened an Etsy shop and had to register with all the states that require it, which at last count was 9 that definitely require registration, 5 that require you contact them to determine whether you are required to register, and 17 that may (likely will) require registration – depending on whether they pass new sales tax laws and when they go into effect.
Also, given that most states have included ‘small seller exceptions’ in their new sales tax laws, if I ran my own website, I would only have to worry about sales in my state of residence, at least until I reached their small seller thresholds. In most instances, those range from $100K-$500K in gross sales or revenue and/or 100-200 transactions per year. (The laws vary widely, so again, do your homework!) Actually, I wouldn’t even have to worry about my own state, because my digital download sales would be exempt. So if I did all my sales through my own website, I likely wouldn’t have to worry about sales tax at all. And if I did, by some miracle, begin making enough sales to have to register, most states don’t require you to register until you reach the threshold.
Of course, the attraction of Etsy and Amazon is the built-in traffic. I get that. But does it balance out against the headache of all the extra paperwork for what I’m looking to do? I mean, I’m not planning to have a business that makes over $100K a year. I just want a small online shop where I can be creative and make some money at the same time. Is that worth the headache of filling out a ton of paperwork for the convenience of Etsy? I could just open an Etsy store and then wait to see where my buyers were located, and then register. But should I? What happens if Etsy collects and remits the sales tax for me and I haven’t yet registered? Will that cause issues?
Etsy also charges fees, so that could balance out what I would need to spend on my own website for sales. Etsy is charging 5% fees on transactions – including shipping. PayPal’s fees are lower than that, but on micro-transactions like mine, the per transaction fees would rack up quickly (2.9% + $0.30 per trans).
Ultimately, I need to sit down and think about all of this and whether I want the headache that comes along with Etsy and the new sales tax requirements, whether I want to try and run my own ecommerce website, or whether I want to just use Patreon or something like it for what I’m trying to do. I’m not sure yet.
I know this was a long post, but I hope you found some of it useful. If you’re thinking of opening an online business – even if it’s on Etsy or Amazon, research, research, research and know what the requirements are for your business. Ultimately, YOU are responsible for your business, whether someone else is collecting the taxes or not.
(All images from Pixabay)