Sales Tax andeCommerce -Simplified.

ContentsIntroduction - 1

Wayfair - Economic Nexus - 1

Know your Business Details - 2

Advisory Services Needed - 3

Technology is a Must - 3

Sales Tax Calculation Engine and Sales Tax Compliance Tool - 4

Sales Tax Return Preparation & Filings - 5

Time Goes On - 6

Summary - 6

Sales Tax and your eCommerce Business:

- 1 -

     ECommerce has transitioned into a catch all term used to describe a business model

that highlights the selling of tangible goods/products over the internet. This type of

model can vary dramatically from one business to the next but the consistent theme is

utilizing the internet to reach and sell to customers that historically would have been

unreachable. The internet and eCommerce have provided businesses with a previously

untapped resource. Physical location is no longer a constraint on business growth.

     As you utilize the internet and technology to promote growth, inevitably, other areasof responsibility grow as well. One very important area of responsibility that growsalmost as exponentially as your eCommerce revenue, is your sales tax collectionobligation.

      Historically (prior to June 2018), sales tax nexuswas determined in a large part by physical presence.As a seller, you would have been required to collectand remit sales tax only in the states where you had aphysical presence (property or payroll). You were notrequired to collect sales tax for sales shipped into astate where you lacked physical presence. Thepurchaser would still owe a use tax on the value of theproduct purchased but, as we all know, very fewindividuals (or businesses for that matter) actuallyremit use tax. This gap left billions of dollars ofuncollected sales tax revenue every year.

     Surprisingly, in June 2018, the U.S. Supreme Court handed down a much anticipated decision in the South

Dakota v. Wayfair case. Wayfair was challenging South Dakota’s application of its sales tax imposed on internet

retailers who made sales into South Dakota but lacked physical presence (property or payroll). South Dakota

prevailed. The court ruled that if a retailer met the South Dakota definition of economic nexus, that retailer had

sufficient contact and/or connection with South Dakota to create substantial nexus and therefore was

required to collect sales tax on sales shipped into the state.

Wayfair - Economic Nexus

    The effects of this decision stretch much further than just large online retailers. Small businesses across thecountry found themselves scrambling to evaluate their “economic nexus footprint”. Many of them didn’tunderstand nexus much less have the tools and expertise to evaluate their nexus footprint. To make thingsworse, many retailer’s ERP systems were not setup to capture information by transaction, product, and/orjurisdiction. This was a major undertaking for small to medium businesses. The end result was many businessesspent significant resources (time and money) to have their operations analyzed and have new eCommercesystems implemented that would accurately track the order and collect the appropriate amount of tax.

- 2 -

    Business models operating within the eCommerce space can have dramatically different

sales tax obligations. It is important not only to fully understand what your business does,

but how it does it. See below for a small (non-exhaustive) but important list of questionsthat must be answered:

Know Your Business!What do I

sell?

Multiple product types

orIndustries

Website, Marketplace,

Catalog or Phone

Retail, Wholesale, Taxable or

Exempt

Accounting System, ERP,

Tax Engine

FOB Origin/Destination

  The answer to the above questions will directly affect the sales tax processes of youreCommerce business. Products in certain industries may be taxable across the board so thefocus may be on rates, collections, and filings. Other industries may weigh heavier onexemptions so there may be more focus on exemption certificate management. If you sellthrough a marketplace, you may not have a collection obligation whatsoever.

However, you could sell through a marketplace and still be required to collect tax on:

How do I sell?

Who do I sell to?

What technology is in place?

Shipping details

Your sales made through a

marketplace

The devil is truly in the details.

Sales made through your own website

Sales made by phone

Sales made by catalog orders

Advisory Services    Diving into the specifics of sales tax will take decades to master. There will be advisoryservices that you will need in order to determine the specifics of your nexus footprint andproduct taxability. These services will provide the roadmap for your sales tax solution as youplan and implement. Every day, businesses must decide whether to do something internally orpay for an expert’s help. Sales tax advisory services are typically an area where you want todefer to the experts.

- Nexus Study

- Product Taxability Study

- Jurisdiction Registration

- Product Mapping

- Voluntary Disclosure Agreements (VDA’s)

    Overlooking (or inaccurate) the above services will likely become very costly. Failure tounderstand your nexus footprint or the taxability of the product is not a situation that will gounnoticed. State agencies are becoming smarter on how they find and track down non-compliant taxpayers. The days of burying your head in the sand are over. A sales tax process isincomplete if any of these services are missing. The worst part is that state law holds you (theseller) responsible for short comings in your sales tax process. If you don’t collect the appropriateamount of sales tax, the difference will come out of your pocket. If you over collect sales tax, guesswhat, you are required to remit every penny.

    Technology is going to play a major role in your sales tax process. Accounting and sales taxsoftware has become more advanced over the past few years and will be integral to your salestax success. That does not mean you can automate and walk away. The process will still need tobe monitored & maintained. Here is a quick list of the different technology requirements thatmost eCommerce businesses will need -

Enterprise Resource Planning (ERP) System

Sales Tax Calculation Engine

Sales Tax Compliance Tool

Technology's Role

- 3 -

- 4 -

   An Enterprise Resource Planning (ERP) tool is going to be essential. An ERP tool has many names/faces

but the idea is one system that handles the majority of the back office needs including, A/R, A/P,

procurement, etc.  A major benefit of an ERP system is that it allows the flow of data between the various

systems and processes. This is a big help when you begin to discuss a Sales Tax Calculation Engine.

   The Sales Tax Calculation Engine is going to be a bolt-on software that talks directly to your ERP system.

The engine will take the specifics (product, price, address) of the customer order and calculate the amount

of tax associated and then it will send it back to the ERP system. At that point, the ERP will complete the

invoice/billing process and collect the sales amount plus tax from the customer. This is a critical cog in the

wheel. If the product mapping is setup incorrectly or Nexus is not turned on for a specific jurisdiction, then

the sales tax engine may return incorrect information.

   Fast forward.

   You now have an ERP system that is connecting all of your systems and data points. That ERP system is

talking with the sales tax engine to determine the appropriate amount of tax on a specific transaction. At

the end of the period, you have all of this data (and sales tax) but what do you do with it? You will need a

Sales Tax Compliance Tool. This tool can be anywhere from a sales tax software provider who also files

sales tax returns, to a fully outsourced service of a sales tax department provided by a CPA firm. The

important piece here is finding the right fit for your eCommerce business. In general, sales tax compliance

(return filings) is a non-value added task. It is necessary, but is not creating value to your bottom line. If you

have a certain level of sales tax expertise on staff, it may make sense for you to utilize a sales tax software

provider along with your staff to complete the filing process. However, if you despise sales tax and want to

focus on your business, the outsourced sales tax service, may be a better fit.

    These two technology requirements are important enough to warrant their own section. All of thetechnology and automation that is available today requires setup and implementation, but these two areespecially critical. If the data coming from these software tools is not as accurate as possible, the results may costyou dearly in the future. This section is not designed to be an all-inclusive discussion, but more so an emphasison the importance.

Sales Tax Calculation Engine and Sales Tax Compliance Tool

   As discussed previously, the sales tax engine is the cogof the wheel that makes the taxability (yes/no) and rate(%) decisions. There are three keys to this portion:

      A nexus study should already exist at this point. Using the nexus study, you will need to letthe tax engine know which jurisdictions your business has a collection obligation. Yes, it ispossible for your business to have nexus but for the product sold to be exempt (or viceversa). The next step is to overlay the product taxability study onto the sales tax engine. Ifthe tax engine receives a nexus “YES” in a state, the next decision is whether or not theproduct is subject to tax in that jurisdiction. CAREFUL. All product mappings are not createdequal. The definition could vary from state to state and mapping a specific product the samethroughout all states without initial research, may land you in sales tax jail. Assuming all iswell up to this point, a rate will be retrieved from the tax engine. Don’t forget to monitor yourrates. There is in excess of 10,000 taxing jurisdictions in the US and they can change theirrates without notice. Finally, do not overlook products and industries with different and/orreduced rates.

Nexus

Taxability

Rate

    Now that a sales tax engine is in place and properly calculating tax, you will need to complete the compliance process. This includes:

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    An average, medium sized eCommerce business, could have 20-40 (possibly more) returnfilings each month. It is likely to require at least 1 FTE to manage the sales tax filing process. Thekey is to have a formalized, documented process. The process will outline who holds whatresponsibilities, back up plans (turnover, promotions, and maternity leave), instructions, logininformation & etc. If you have a software provider and/or CPA firm that assist, the plan will alsodocument which responsibilities the providers cover and which fall on the business.

     In today’s technology driven world, there is likely a technology option that can dramaticallyreduce or eliminate your sales tax burden. Often times, CPA firms can manage and oversee yoursales tax process cheaper and more effectively than your own staff. Not only can they managethe process, but they may also bring cost saving or time reducing ideas that you have notconsidered. CPA firms tend to have industry leading ideas because they are exposed to bestpractices within the industry. Do not under estimate the power and value of seeking help for salestax compliance.

Return preparation (assuming already

registered within each jurisdiction)

Return filing

Payment remittance

Sales Tax Return Preparation & Filings

    Significant time and resources have been dedicated to your sales tax needs, but be careful not to buildand forget it. Sales tax requires ongoing monitoring and maintenance. Frequent economic nexusevaluation is key. A basic economic nexus evaluation (quarterly/annually) is a must when staying on topof sales tax obligations.

    As eCommerce businesses grow, there is a desire to expand into new products and/or industries.Oftentimes, Tax Departments are the last to be notified. Audits and notices are typical trigger eventsthat bring to light new products and industries. A business filing in 20-40 jurisdictions is inevitably goingto be audited and the more jurisdictions where you have nexus, the more audits you are likely to have. Aformalized audit team and process is key, as well as a documentation process for all notices. These can betime consuming and frustrating. Many times, notices are triggered by nuances of tax returns and manycan be eliminated with proper tax filings. This is another opportunity to consider a CPA firm’s sales taxservices. A firm will have access to the tools to monitor and maintain product taxability matrices, as wellas the resources to manage multiple high volume audit requests.

    ECommerce business models will inevitably have growing sales tax obligations. Almost all states thatadminister a state level sales tax have some version of economic nexus requirements for remote retailers. As thebusiness grows, so too will the sales tax requirements. It is important to remember that there is morethan one right way to manage sales tax compliance. The key is not to avoid those obligations, but toaddress them and act accordingly.

    The days of turning the other sales tax cheek are over. Whether you keep it in-house, outsource, or acombination, it is clear that sales tax for the eCommerce world is a new phenomenon that is here to stay. Taxingjurisdictions will continue to search for new innovative ways to raise revenue and the complianceresponsibilities for those will ultimately always fall on the business.

To Summarize

- 6 -

Time Goes On

For more information specific to your business, visit salestaxsimplified.comand schedule your free consultation with Jeff Dorris, our Sales Tax Director,today!

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