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How to AvoidE-Commerce Tax Pitfalls
Featuring:Shane Ratigan, Avalara Inc.
Eric Smith, Modern Distribution Management
July 27, 2017
Sponsored by:
Avalara helps make sales tax compliance simple and automatic for businesses of all sizes.
The company provides end-to-end solutions that automatically determine taxability, identify applicable tax rates, accurately
calculate taxes, prepare and file returns, remit taxes, maintain tax records, and manage tax exemption certificates.
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www.avalara.com877-780-4848
©2017 Gale Media, Inc. All rights reserved.
Agenda• The Sales Tax Revenue Landscape• Nexus: When and Where to Collect and Remit• Determining the Right Rate• Tax Implications of Drop Shipping• Conclusion and Q&A
Eric SmithAssociate Editor,Modern Distribution Management
Speakers
Shane RatiganContent Compliance Manager, Avalara Inc.
©2017 Gale Media, Inc. All rights reserved.
Making sales tax less taxing.
Shane RatiganTax Law and Compliance Expert at Avalara, Inc.
Shane Ratigan is responsible for managing compliance processes, reporting, and legislative trends that impact management of indirect tax.
As a graduate of the University of Washington School of Law (LLM), Shane is an expert on sales tax and regularly counsels organizations from all industries on maintaining compliance.
Presenter
Making sales tax less taxing.
Where do states turn for tax revenue?
When general sales tax and selective sales tax are combined, sales tax makes up 47% of total state revenue
Source: US Census Bureau, Census of Governments: Finance – Survey of State Government Tax Collections at www.census.gov/govs/statetax
Total State Government Tax Collections by Category
Other taxes 3.9%
Corporation net income taxes 5.3%
Total license taxes 6.8%
Total selective sales taxes 16.6%
General sales and gross receipts taxes 30.5%
Property taxes 1.6%Individual income taxes 35.3%
Making sales tax less taxing.
The Growth of E-CommerceE-Commerce sales are projected to reach $500 Billion by 2018.
Making sales tax less taxing.
Loss of State Revenue from E-Commerce
In 2009, California BOE projected close to $800 Million in uncollected consumer use tax.
Making sales tax less taxing.
Nexus:When and Where to Collect and Remit
Making sales tax less taxing.
Nexus = Substantial PhysicalPresence
Once Nexus is created, SellerInherits Legal Obligation to Collect
Common Nexus “Triggers”• Owns An Office• Owns a Warehouse• Remote Employee on Payroll• Owns Property
The Concept of Nexus
Making sales tax less taxing.
The Role of Nexus Don’t always have to be physically present in a state.
Remote staff, using a drop shipper, even attending trade shows, can establish nexus in many states.
More than 20 states have enacted “click-through” or affiliate nexus laws
13 states have either enacted or are in the process of enacting “economic nexus” laws, whereby companies that generate at least $250,000 in sales are obligated to collect and remit sales tax.
Making sales tax less taxing.
Sales Tax Holidays
• Clothing, school supplies, and even firearms are tax exempt at certain times in as many as 17 states.
• Holidays are always in flux.
Making sales tax less taxing.
Determining the Right Rate
Making sales tax less taxing.
Determining Taxability
Rules and rates vary between states
The following industries have varying taxability rules Software / hardware Digital goods Services Medical device / equipment Food / beverage Clothing / apparel School-related products Dietary supplements And many other industries / products
Making sales tax less taxing.
Product Taxability is (Always) Changing
Taxable
Exempt
Taxable
Exempt
Candy with or without flour can determine if it is taxable
Non-carbonated with supplement label is taxable
Non-carbonated with nutritional label is exempt
Making sales tax less taxing.
Determining the Right Rate
Taxing jurisdictions don’t always follow ZIP Codes! Individual counties and municipalities levy sales taxes in
addition to state rates Tax rates can vary significantly within a ZIP code ZIP codes
Are a blunt instrument for determining sales tax rates and boundaries
Will almost certainly lead to calculation mistakes
Can lull you into a false sense of security
Making sales tax less taxing.
Ex. Greenwood Village, CO has one ZIP code, but four different sales tax rates!
Automation Tip! Geolocationtechnology determines the exact point of taxable transaction.
You Can’t Rely on Zip Codes
Making sales tax less taxing.
Bill to Vs. Ship toSourcing. Most states are destination-based (they charge sales tax based on the location of the end-user), there are several that base sales taxes on the seller’s location.
Making sales tax less taxing.
Tax Implications of Drop Shipping
Making sales tax less taxing.
Retailer(Distributor)
invoicepayment
Manufacturer/Wholesaler(Drop-shipper)
Customer(End User)
Tax Implications of Drop Shipping
Making sales tax less taxing.
Tax Implications of Drop Shipping
There are Three Parties to a Drop Ship arrangement:1. Retailer/Distributor: The retailer of the item. The “Seller” for
Sales Tax Purposes.2. Manufacturer/Wholesaler: The provider of the item. The “Drop
Shipper.”3. Customer: The final purchaser and user of the item. “Wants his
stuff.”
There are Two Sales in a Drop Shipment:– The sale from the Manufacturer to the Retailer/Distributor– The sale from the Retailer/Distributor to the Customer.
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Making sales tax less taxing.
Tax Implications of Drop Shipping• The transaction between the Retailer and Customer is
the taxable retail transaction.
• There is no retail sale transaction between the Manufacturer and Customer.
• The transaction between the Manufacturer and Retailer/Distributor is a transaction for resale.
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Making sales tax less taxing.
Tax Implications of Drop Shipping
• Use of a Drop-Shipper does not alter the obligation to collect in a state where the Retailer already has nexus.
• Even when a Retailer lacks nexus in the Customer’s state, a Drop-Shipper with nexus in the customer’s state may have an obligation to collect.
Making sales tax less taxing.
Where Tax Compliance Gets Tricky
• In states where foreign reseller exemption certificates are accepted, the use tax obligation on the Customer.
• Some states (about 33) allow Drop-shippers to accept out of state exemption certificates from Retailers, others (about 13) do not.
• A challenge lies in those states who do not accept out-of-state exemption certificates.
The Retailer does not concede nexus in the Customer’s state. The Drop-shipper concedes nexus in the Customer’s state.
Making sales tax less taxing.
Where Tax Compliance Gets Tricky (cont.)
• In States where foreign reseller exemption certificates are not accepted, rules exist to determine the appropriate tax base.
• For example, in CA, a Drop-shipper is required to assess tax on the sale to the Retailer at 110% of the price charged to the Retailer, unless the Drop-shipper knows the actual retail price paid by the customer, then the Drop-shipper must charge tax on the full retail amount to the Retailer.
The Retailer does not concede nexus in the Customer’s state. The Drop-shipper concedes nexus in the Customer’s state.
Making sales tax less taxing.
Where Tax Compliance Gets Tricky (cont.)
In other states, the Drop-shipper is obligated to collect sales taxes on the actual price paid by the Retailer:• DC• Florida• Louisiana• Maryland• Nebraska• Nevada• Tennessee
The Retailer does not concede nexus in the Customer’s state. The Drop-shipper concedes nexus in the Customer’s state.
Making sales tax less taxing.
Where Tax Compliance Gets Tricky (cont.)
Some states obligate the Drop-shipper to collect sales taxes on the actual price paid by the Customer.• California• Connecticut• Hawaii• Massachusetts• Rhode Island• Wisconsin
The Retailer does not concede nexus in the Customer’s state. The Drop-shipper concedes nexus in the Customer’s state.
Making sales tax less taxing.
Conclusion
Making sales tax less taxing.
Tax Compliance: Pitfalls & Mistakes Not knowing where you have nexus
Charging the wrong rate (errors in jurisdiction or taxability)
Not knowing drop shipping rules (for each state)
Failing to file a return
Failing to report sales
Taking excessive credits or exclusions on a return
Filing returns with errors
Return information that doesn’t match other records
Failing to fix mistakes found in previous audit
Making sales tax less taxing.
Tax Compliance is a Pain! Sales Tax is a statutory requirement
– Companies are always at risk of an audit (when, not if) – Audits frequently result in back taxes and penalties
Manual sales tax management– It’s labor-intensive – Human error leads to inaccurate results– Expensive
– Rules are always in flux: 2014 had close to 14,000 rule changes in U.S.
100% non-revenue generating activity– It makes sense to automate with a technology solution
Making sales tax less taxing.
Tax Compliance: Risk Prone & Expensive
Source: Wakefield Research, July 2017
Average total cost for businesses to manage a sales tax audit
75% of tax professionals believe an auditor would find a mistake if audited for sales and use tax.
$301,496
Making sales tax less taxing.
Tax Compliance: Time-Consuming
Making sales tax less taxing.
Why cloud software is the answer...
Real-time, accurate sales tax calculation
ERP,Ecommerce,
POS / MPOS,Payments,
etc.
Government
$ RemittancesTax rates
Customer invoice systems Automated storage,
management of tax certificates,
exemptions, etc.
Automated returnsprocessing and remittance
SaaS
Making sales tax less taxing. 30
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How to Avoid E-Commerce Tax Pitfalls
July 27, 2017
Sponsored by: