SIMPLIFYING SALES TAX FOR E-COMMERCE MERCHANTS

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1 SIMPLIFYING SALES TAX FOR E-COMMERCE MERCHANTS Sponsored by Avalara, Inc. Copyright 2013

2 What is Nexus? Nexus means, essentially, a connection. E-commerce merchants must have a connection (or, nexus) to a state in which a customer resides for the merchant to be liable for sales taxes. But states define nexus in different ways, and this makes it confusing to a merchant. Some examples of nexus are: Do you have traveling sales people that physically enter the state to conduct business? Do you utilize contract labor in any way or for any purpose in conjunction with the sale of tangible personal property or the performance of a service? Do you have marketing personnel and/or other company representatives, or are you affiliated with individuals that enter the state for purposes of conducting business or representing your business in any way, either directly or indirectly? Do you own or lease any real or personal property located in the state? Do you participate in any trade shows or exhibits that promote your products or services in the state? Sales Tax Background States, counties and municipalities have historically relied on local brick-and-mortar businesses to collect retail sales taxes. These businesses collected the sales tax from their customers, and then remitted the tax proceeds to their local sales tax jurisdiction. It was a straightforward process, and no one much quarreled with who owed the taxes and who would receive them. That straightforward proposition became complex with the rise of thousands of catalog merchants in the 70s and 80s. Catalog merchants sold to consumers nationwide, who began to shift their purchases away from local brick-and-mortar merchants. This reduced revenue to local sales tax jurisdictions because catalog companies rarely collected sales taxes from their customers. Merchants Are Responsible One state, North Dakota, eventually sued a catalog company, Quill Office Products, to force Quill to pay sales taxes for North Dakota residents who purchased from Quill. That case ultimately rose to the U. S. Supreme Court, who in 1992 issued a mixed ruling. The Court said, essentially, that catalog companies owed the sales tax, but since there were over 6,000 sales tax jurisdictions in the U. S. at the time of the case (many of whom had different tax rates and other rules), the ability of a catalog company to collect and pay the money to these thousands of jurisdictions was impractical. Thus, while the Court did not force Quill to pay the state of North Dakota, it established that merchants are responsible for the taxes. This sales tax trend that began with catalog companies accelerated in the late 1990 s with the rise of e-commerce merchants. These merchants seldom collected sales taxes from their online customers, and, consequently, local jurisdictions continued to lose sales tax revenue. According to the United States Census Bureau roughly 33% of state revenue is collected from sales tax. In the early 2000 s it was projected that by 2008, the amount of lost revenue will balloon to a staggering $33.8 billion. With an increase in lost revenue, various states began to formulate a plan to collect the money. Page 1 of 4. Simplifying Sales Tax For E-Commerce Merchants Avalara 2013

3 Simplify and Automate Beginning in 2000 a plan that eventually became known as the Streamlined Sales Tax Project, or SSTP, was launched. SSTP s mission is to simplify sales tax administration and to provide for technology solutions to assist merchants in the collection of sales taxes due from their customers. Developing such sales tax technology solutions developed naturally from cases such as the 1992 Quill case, in which the Supreme Court stated that merchants by themselves could not be expected to track the sales tax rates and policies of thousands of taxing jurisdictions and regions. The SSTP aimed to certify a select group of private companies (called Certified Service Providers ) who would track these rates and policies, and would otherwise develop software to assist merchants to calculate, collect, report on and remit the tax. Avalara, Inc., the publisher of this white paper, is one of three SSTP Certified Service Providers. Thousands of Rules, Jurisdictions and Tax Rates Sales tax rules vary widely from state to state, and from jurisdiction to jurisdiction. Some states require merchants to have a physical presence in that state (such as an office or a warehouse) to be liable for sales taxes. Other states require merchants to simply have employees or subcontractors residing in that particular state, while other states exempt various products from sales taxes altogether. For example, toothbrushes as well as normal toothpaste are taxable in Texas; however, fluoridated toothpaste is statutorily exempt in Texas as part of an exemption for over-the-counter drugs and medicines. Certain states have a minimum annual sales level before a merchant must collect and pay and other states such as Oregon and Alaska have no sales taxes at all. Page 2 of 4. Simplifying Sales Tax For E-Commerce Merchants Avalara 2013

4 Avalara Simplifies Sales Taxes Avalara simplifies all of this for e-commerce merchants. Its web-based AvaTax service links directly to a merchant s online shopping cart (via an application programming interface, or API) and calculates, in real time, whether the merchant should be collecting sales taxes from an online consumer during the checkout process. When selecting to use AvaTax as your sales tax engine, you can rest assured that your sales tax calculations are based on the most current rates and boundaries information as well as the most accurate jurisdictional assignmentcapabilities in the industry. Avatax does this by identifying the address, and then applying the sales tax rates, rules, and regulations of every applicable taxing jurisdiction (state, county, city, school district and so forth) for that specific location. This calculation is done instantly during the online checkout process. AvaTax will then show the amount of taxes due from a customer and provide for the collection of that money in the overall checkout process. AvaTax works for any e-commerce merchant, selling to any consumer residing in a U.S. state. Not only does Avalara determine the amount of sales taxes that e-commerce merchants must collect, but it will also will also remit the funds to the taxing entities and file the applicable sales tax returns. Avalara s AvaTax system is maintained by its staff of CPAs and other tax professionals, who track sales tax rates, rules and changes from thousands of taxing regions. For example, an e-commerce merchant is located in New York and sells products to a customer in California. The sales tax possibilities of this single transaction are complex. First, AvaTax would validate the address in order to accurately determine the sales tax rules for New York and for the California jurisdiction in which the consumer resides. Then, AvaTax would identify the specific products purchased by the consumer to determine if sales taxes apply to those products in that jurisdiction (many products, such as food, are frequently exempt from sales taxes). AvaTax would perform other tests during this transaction, such as determining the overall amount of products sold by the merchant to that particular jurisdiction and whether the merchant has nexus, or an obligation to collect sales tax within that jurisdiction (such as employees, subcontractors, offices, and warehouses). AvaTax does all of this instantly, while the customer is clicking through the online checkout process. If taxes are owed from that California-based customer, AvaTax would: Apply and collect that amount to the total amount due during the online checkout process. File the sales tax returns with the applicable California jurisdictions, if using Avalara s managed return service. Remit the liability. Page 3 of 4. Simplifying Sales Tax For E-Commerce Merchants Avalara 2013

5 AvaTax: Getting Started To get started with AvaTax, an e-commerce merchant must first complete Avalara s set-up process. This identifies where the merchant has offices, warehouses, employees, subcontractors and so-forth, therefore having nexus. It establishes what products the merchant sells and whether or not they are taxable. And it collects all the necessary information from the merchant to file sales tax returns. Setting up your e-commerce busness and tax information within AvaTax is quick and easy. Nexus for each state, which is defined by your physical presence, can be turned on or off via a check box. AvaTax links to major shopping carts, such as ebay s Prostores, 3DCart and hundreds of others without any additional programming. For custom shopping carts, Avalara provides an API to link with AvaTax. This usually requires only a modest amount of developer interaction, which can be done by either Avalara s programming staff or the staff of an e-commerce merchant. AvaTax also integrates with popular software packages such as QuickBooks, Microsoft Dynamics GP, AX and NAV; Sage MAS 90 / 200, MAS 500 and ACCPAC, and Netsuite, among others. Overall, the setup and integration is easy, and takes, typically two to three days. Avalara s support team assists merchants throughout the process. To learn more about pricing, view online demonstrations, or chat about AvaTax s capabilities, visit us at or call today. Learn more about AvaTax today. Avalara Making sales tax less taxing. Avalara may have patents, patent applications, trademarks, copyrights, or other intellectual property rights governing the subject matter in this document. Except as expressly provided in any written license agreement from Avalara, the furnishing of this document does not give you any license to these patents, trademarks, copyrights, or other intellectual property. Page 4 of 4. Simplifying Sales Tax For E-Commerce Merchants Avalara 2013