How to Avoid E-Commerce Tax Pitfalls

Size: px

Start display at page:

Download "How to Avoid E-Commerce Tax Pitfalls"

Franklin Austin
5 years ago
Views:

1 How to Avoid E-Commerce Tax Pitfalls Featuring: Shane Ratigan, Avalara Inc. Eric Smith, Modern Distribution Management Sponsored by: July 27, 2017

2 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

3 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 2017 Gale Media, Inc. All rights reserved.

5 Presenter Shane Ratigan Tax 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.

6 Where do states turn for tax revenue? 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% Property taxes 1.6% Individual income taxes 35.3% When general sales tax and selective sales tax are combined, sales tax makes up 47% of total state revenue General sales and gross receipts taxes 30.5% Source: US Census Bureau, Census of Governments: Finance Survey of State Government Tax Collections at

7 The Growth of E-Commerce E-Commerce sales are projected to reach $500 Billion by 2018.

8 Loss of State Revenue from E-Commerce In 2009, California BOE projected close to $800 Million in uncollected consumer use tax.

9 Nexus: When and Where to Collect and Remit

Obligation to Collect Common Nexus Triggers Owns An

10 The Concept of Nexus Nexus = Substantial Physical Presence Once Nexus is created, Seller Inherits Legal Obligation to Collect Common Nexus Triggers Owns An Office Owns a Warehouse Remote Employee on Payroll Owns Property

11 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.

12 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.

13 Determining the Right Rate

14 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

15 Product Taxability is (Always) Changing Taxable Candy with or without flour can determine if it is taxable Exempt Taxable Exempt Non-carbonated with supplement label is taxable Non-carbonated with nutritional label is exempt

16 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

17 You Can t Rely on Zip Codes Ex. Greenwood Village, CO has one ZIP code, but four different sales tax rates! Automation Tip! Geolocation technology determines the exact point of taxable transaction.

18 Bill to Vs. Ship to Sourcing. 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.

19 Tax Implications of Drop Shipping

20 Tax Implications of Drop Shipping payment invoice Manufacturer/Wholesaler (Drop-shipper) Retailer (Distributor) Customer (End User)

21 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. 17

22 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. 18

23 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.

24 Where Tax Compliance Gets Tricky The Retailer does not concede nexus in the Customer s state. The Drop-shipper concedes nexus in the Customer s state. 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 outof-state exemption certificates.

25 Where Tax Compliance Gets Tricky (cont.) The Retailer does not concede nexus in the Customer s state. The Drop-shipper concedes nexus in the Customer s state. 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.

26 Where Tax Compliance Gets Tricky (cont.) The Retailer does not concede nexus in the Customer s state. The Drop-shipper concedes nexus in the Customer s state. 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

Where Tax Compliance Gets Tricky (cont.) The Retailer does not concede nexus in the Customer s state. The Drop-shipper concedes nexus in the Customer s state.

27 Where Tax Compliance Gets Tricky (cont.) The Retailer does not concede nexus in the Customer s state. The Drop-shipper concedes nexus in the Customer s state. 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

28 Conclusion

29 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

30 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

31 Tax Compliance: Risk Prone & Expensive $301,496 75% of tax professionals believe an auditor would find a mistake if audited for sales and use tax. Average total cost for businesses to manage a sales tax audit Source: Wakefield Research, July 2017

32 Tax Compliance: Time-Consuming

33 Why cloud software is the answer... Tax rates SaaS $ Remittances Customer invoice systems ERP, Ecommerce, POS / MPOS, Payments, etc. Real-time, accurate sales tax calculation Automated storage, management of tax certificates, exemptions, etc. Automated returns processing and remittance Government

34 Request a Demo shane.ratigan@avalara.com 30

35 Questions? How to Avoid E-Commerce Tax Pitfalls Sponsored by: July 27, 2017

10 Sales Tax Rules to Live By

10 Sales Tax Rules to Live By Chuck Marcouiller, Tax Technology Expert Avalara Avalara Chuck Marcouiller Tax Technology Expert, Avalara 20 Years in tax technology and education Held operational and training