sales tax and the internet merchant• sub-second performance is vital for good customer experience...

Sales Tax and the Internet Merchant

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This manual was created for online viewing. State specific information in this manual is used for illustration and is an example only.

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Jordan LangAvalara

Sales Tax and the Internet Merchant

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mail: P.O. Box 509 Eau Claire, WI 54702-0509 • telephone: 866-352-9539 • fax: 715-833-3953email: [email protected] • website: www.lorman.com • seminar id: 394564

Prepared By:Jordan Lang

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© Avalara

Sales Tax & the Internet Merchant

Presented by Jordan Lang

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Making sales tax less taxing

Learning Objectives

Upon completing this webinar, you will be able to:• Determine appropriate Nexus – and Nexus triggering events

• Understand the current tax landscape and how special taxing jurisdictions, including state tax holidays affect tax compliance

• Explain the steps your business needs to have in place to properly collect and remit sales tax

• Identify whether or not your state is an SST State and how it affects sales tax compliance

• Compare the different automation solutions available and how they help with sales tax compliance


Agenda

1. The new state of commerce

2. Sales tax compliance landscape

3. Redefining nexus

4. Audit protection

5. Automation or not?

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© Avalara

The New State of Commerce

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• According to a report by Forrester, more than 60% of retail sales will involve the Internet by 2017.

• In 2013, 31 states projected budget deficits totaling $55 billion.

• NRF estimates $24 billion in sales taxes goes uncollected on the Internet.

Therefore:

• As tax-collecting agents of the state(s), they are looking to your business to find more money.

• This increased focus creates compliance risk for you.

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The New State of CommerceWhen general sales tax and selective sales tax are combined, sales tax makes up 47% of total state revenue.

Other taxes4%

Corporation net income

taxes5% Total license

taxes7%

Total selective sales taxes

17%

General sales and gross

receipts taxes30%

Property taxes2%

Individual income taxes

35%

Total State Government Tax Collection by Category



• States are finding more sales tax revenue by hiring more auditors:– California announces hiring 100 auditors over the next three

years

– Idaho hires 48 auditors that stay on as full-time staff

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© Avalara

Sales Tax Compliance Landscape

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Understanding the Basics: Sales Tax vs. Use Tax• Sales tax: imposed on the gross receipts from retail sale of tangible

property in state

• Use tax: imposed on the consumption or use of tangible property in state

– Purchases of equipment and supplies from out-of-state for use in business

– Withdrawals of inventory for taxable use such as R&D, promotional materials, warranty repairs, etc.

• The difference:

– Sales tax: imposed on activities of a seller within or on transactions originating and ending in a state

– Use tax: imposed on transactions or on purchases originating outside a state

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Sales Tax Compliance Considerations

• 11,000+ taxing jurisdictions

• Thousands of changes to tax laws, including:– Jurisdictional rate changes

– Tax holidays

– Jurisdictions that levy new taxes or eliminate taxes

– Jurisdictions that expand geographic boundaries

• Accuracy is everything– For customers, auditors, and for your business


E-tailers Struggle with:

• Do I have to collect (and, if so, from whom)?

• For what do I have to collect?

• How do I know what to charge (and is that rate current)?

• How do I register, report, and remit?

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E-tailers Tell Us:

• Accurate sales tax calculations are critical

• Sub-second performance is vital for good customer experience

• Managing sales tax rates and rules is a painful process

• Embedded reporting capability and real-time data access is necessary to streamline the compliance process

• Reduction of risk associated with audits is vital

• Outsourcing sales tax compliance is strategic


Polling Question 1

Which of the following items are nexus-triggering events?A. Trade show attendance

B. Training

C. Affiliates

D. All of the above

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Polling Question 1 Results (Placeholder)

© Avalara

Redefining Nexus and Jurisdictions

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• 150+ million mailing addresses

• 11,000+ jurisdictional rules

• 35,000+ sales / use / rental tax rates

• ~ 30 M product / service exemptions

• 750,000+ buyer / seller exemptions


Redefining Nexus and Jurisdictions

Knowing where you are required to collect is becoming more difficult.

• Nexus means a “connection.”

• Every state has the right to define who has to collect sales tax, what those taxes are, and any exemptions that may be allowed.

• Ecommerce merchants must have a connection to a state in which a customer resides for the merchant to be liable for sales tax.

• States define nexus in different ways, and this makes it confusing.

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How Do You Know if You Have Nexus?

• Do you have traveling salespeople in the state?

• Do you utilize contract labor in the state?

• Do you have company representatives in the state?

• Do you own or lease any real or personal property in the state?

• Do you promote your products or services in the state?

• Do you participate in trade shows or exhibits in the state?

• And every year this list continues to grow.


ZIP Codes: the Wrong Tool for the Job

• 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.

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Taking Care of Business

Crossing your t’s and dotting your i’s:

Once you’ve figured out where your business has nexus, you need to ensure that you are properly set up to collect and remit sales tax within applicable states.


Accuracy is Everything

• Sales tax is calculated based on specific laws, regulations and rates defined for state, city, county – and in some cases special taxing jurisdictions and Regional Transit Districts.

• These jurisdictions DO NOT line up with ZIP codes.

• In 2012, the number of changes in these rates, rules and boundaries equaled or topped seven thousand across 46 states.

• It is extremely important for ecommerce businesses to ensure accuracy in rates and taxability.

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Polling Question 2

Using Zip Codes is the most reliable way to determine sales tax.A. True

B. False



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7.85%

4.35%

4.35%

6.85%

7.72%

7.35%

5.10%

80111 Taxes Represented:2.9% Colorado State

.25% Arapahoe County

1.0% Douglas County

3.5% Englewood City

3.0% Greenwood Village City

2.5% Centennial City

1.0% Regional Transport District

.10% Football District

.10% Science and Cultural District

Determining sales tax rates by

ZIP codes is inaccurate and risky.


7450 Leyden StreetTotal Sales Tax: 0.0925

COLORADO: 0.0290 ADAMS: 0.0075

COMMERCE CITY: 0.0450 SCIENTIFIC & CULTURAL: 0.0010

DENVER AREA TR: 0.0100 7495 Locust StreetTotal Sales Tax: 0.0475

COLORADO: 0.0290 ADAMS: 0.0075

SCIENTIFIC & CULTURAL: 0.0010 DENVER AREA TR: 0.0100

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Streamlined Sales Tax States

24 and Growing:


Polling Question 3

What is the threshold for collecting sales tax? A. $5,000

B. $100,000

C. $1,000,000

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Audits Happen. Protect Yourself.

• Keep your sales tax collection records in perfect order.

• Know where you owe.

• Ensure you have accurate rates & taxability.

• Properly manage exemption certificates.


Key Areas of Risk for E-tailers

• Incorrect tax rates due (often based on ZIP codes).

• Proper documentation for sales tax exemption.

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Tips to Reduce Audit Risk

You should:

• Do a nexus study

• Stay up-to-date with rate, rule, and boundary changes

• Report consumers’ use tax

• Be compliant from day one, especially new businesses

• Automate with technology

Make sure you have:

• An understanding of your filing requirements

• Calculations that are rooftop accurate

• Product taxability coverage

• Detailed sales records

• A process for managing exemption certificates


Avoid These Common Mistakes

• 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

• Mistakes found in previous audit

• Previous finding of exemption certificate misuse

• Not reporting use tax

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© Avalara

Automation or Not?


Automation or Not?

• Periods of high growth, or upgrades or changes to your ecommerce site, provide good opportunities to explore how automating sales tax can help your business.

• Many ecommerce businesses find that automation:– Saves time

– Increases accuracy

– Mitigates risk

– Improves efficiency

– Increases profitability

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How Does it Work?

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Tax RatesTax BoundariesTaxability Rules


Benefits of Automation

Just like outsourcing payroll, companies that outsource sales tax benefit by:

• Achieving compliance

• Cutting costs

• Increasing efficiencies

• Focusing on growth

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Polling Question 4

How does your company currently handle sales tax compliance?A. We have an automation platform within our ERP

B. Manually – we look up each transaction

C. Rate tables

D. None of the above

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About Avalara

We’re a team of developers, accountants, support specialists, marketers, salespeople, researchers, and technologists who know we’re on to something big.

We know we are part of a team that is revolutionizing what is a huge drain for businesses of all sizes: managing the compliance of transactional taxes, from sales and use tax to 1099s and more.


Questions?

Contact:

Jordan Lang

Senior National Director E-Commerce Team

Avalara

[email protected]

(206) 826-4900 x1418

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