The recent U.S. Supreme Court ruling applying state sales tax to online sales could help level the playing field between brick-and-mortar stores, which generally collect sales tax, and electronic retailers, which often don't.
But the new rules of engagement come with certain challenges as well, and some small-business owners say the additional paperwork is a complex burden.
“The concern is how many states will start to collect tax from retailers on their internet sales, and about some states, like New York and California, that have multiple rates in local jurisdictions,” said Louis Miele, co-managing partner of CPA firm Leaf Saltzman. “Researching the rates and determining what’s taxable and what isn’t can be time-consuming, especially for a small company. Computer programs may help.”
In New Jersey, Senate Bill 2794 and companion Assembly Bill 4261 require sellers to collect and remit sales tax if they had taxable sales into New Jersey of more than $100,000 per year; or, if they engaged in 200 or more separate taxable transactions during a calendar year. Other states may have their own thresholds.
“I have a construction client that does business in multiple states,” Miele said. “In some cases, the company’s suppliers didn’t bill them for use tax, so we developed a system for them to track and pay use tax as appropriate. On the other hand, a different client was buying office supplies goods from Florida and was not being charged sales tax and inadvertently neglected to remit use tax. That got picked up during a sales tax audit, and the business will have to pay about $1,000 plus interest.”
When the end user is a consumer, the omission is less likely to be discovered, said Sandy Weinberg, a principal of the CPA firm PKF O’Connor Davies, and leader of its State and Local Tax Practice
“Generally, a consumer who wasn’t billed on a taxable purchase is supposed to declare and remit the amount as use tax on their personal income tax return,” Weinberg said. “In practice, many individuals didn’t do this, and it just isn’t practical to states to try to track down all this activity on an individual level.”
As e-commerce boomed, the gap between sales taxes due to states and the amount that wasn’t being collected mushroomed, so the Supreme Court’s ruling wasn’t exactly unexpected. The decision cleared the way for states to start requiring retailers to collect sales tax on certain online transactions and it looks like many will do that.
“Within 48 hours of the decision, legislators from nearly every state contacted the Tax Foundation to ask what changes they should make to their sales tax to be able to collect tax on internet purchases,” according to the Washington, D.C.-based think tank, which collects data and publishes research studies on U.S. tax policies at both the federal and state levels.
“Some states may adopt laws that emulate South Dakota’s [it applies to online sellers with more than $100,000 in sales to South Dakota residents or 200 or more transactions] in every respect,” the Tax Foundation said. “Other states may adopt laws that adopt only some of the features, and that would likely be subject to further litigation. Some states may not act until their next regular legislative session, while others may never act.”
MB Stone Care has some concerns about having to comply with a myriad of regulations. The seven-person, North Haledon-based company sells care products for natural stone, tile, porcelain and other hard surfaces, in addition to providing natural stone restoration and protection services.
“We have facilities in North Carolina and New Jersey, and we currently charge sales tax as appropriate on our online sales in those states,” said Managing Member Stu Rosen. “But if each state passes their own laws, we’ll have to understand their requirements and may have to track the number of sales in each state and the dollar amount. This can be very complicated, especially if a state has different rates in local jurisdiction.
“So I imagine we’ll work with our Leaf Saltzman CPAs and try to get compliance software,” he added. “Any time you get big legal or regulatory changes like this, it can be stressful because the company has to gear up and then train the staff to handle the new rules.”
Rosen is also worried about a potential impact on his sales volume.
“Will cost-conscious customers perceive this as a price increase?” asked. “This could affect our sales volume. Also, if certain states have a lot of compliance issues for a relatively small amount of activity, we may think about halting our online sales there.”
Right now, the best approach for small businesses is “to stay current and take a step-by-step approach,” said Weinberg.
Weinberg outlined the steps that his firm previously took to help a client — a New York-based online women’s clothing company that sells to about 35 states — with compliance.
“We started by setting up a state-by-state sales tax exposure matrix showing where they sell and what the rules are,” he said. “We noted whether the state has South Dakota-type of regulations, and the date they became effective or are scheduled to become effective. This way we can advise them where and when they have to start registering with a state to collect and remit sales taxes.”
Amid all of the confusion there is this consensus: Until a uniform sales tax system is adopted by states nationwide, accountants can expect plenty of questions.