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Avoiding the Pitfalls of the Sales Tax Nexus
The members of the European Union are among 160 nations that use value added taxation (VAT). The United States employs a very different system: the sales tax. Both VAT and sales tax have their advantages and complications.
Steps or localities?
A VAT is assessed at every step of the supply chain of a product, representing the "value" added by each link. For example, when a manufacturer converts plastic into a disc, value is added above and beyond the cost of the plastic. When that disc is then etched as a DVD, the process adds value again.
The increase in price from the wholesaler of the video to a retailer adds further value. For each of these transactions, a standardized tax percentage is remitted to a government agency. Sales tax is paid at one level when a customer orders the disc online or selects it from the stock of a brick-and-mortar outlet.
On the surface, this system would seem more straightforward, but the determination of the tax has myriad complexities, depending on the precise location of the consumer to whom a disc is shipped, or the store that sells it.
How are sales taxes determined?
Sales taxes are anything but standardized. States, counties, cities, and towns can all decide how much they will charge. Over 12,000 entities are involved, and boundaries are constantly changing. All but five of the 50 states - Alaska, Delaware, New Hampshire, Oregon, and Montana - have statewide sales taxes.
Even among these, Alaska and Montana allow local governments to assess them. Distinguishing between adjacent areas with different rates can be so confusing that online sellers must use GPS rather than ZIP codes to decide what they must legally collect. Homes and businesses sharing the same post office may fall under differing laws.
What happens if an online seller doesn't collect sales tax?
Both domestic and international sellers are required to register in each state where they owe taxes and states audit businesses to confirm that they are receiving all the sales tax revenues they consider due. If a company does not remit what the state believes it owes, the government may charge its penalties and interest. In 2014, California, the home of a ninth of the U.S. population, hired over 100 professionals to ensure that it received its taxes. Audits can cost as much as $100,000, a sum that could put many online sellers out of business.
How bizarre is the bazaar?
Some states have rules that appear to have no logical basis. If a seller offers trading cards to go with a book or video, it should be aware that Alabama charges 10 cents on any deck of 54 cards or less. The vendor must also pay an annual tax.
In Tennessee, local taxes are paid on top of a base state percentage and rise with increased sales. Thus, a successful business may pay a higher rate than a competitor with a lower gross.
What is a nexus and is it good news?
Amid the massive confusion an online retailer can face coping with United States' sales taxes, there appears to be a beacon in the dark. Vendors are only compelled to charge sales tax if they maintain a nexus, or presence, within the jurisdiction to which they are shipping. Unfortunately, there is a lack of agreement among states as to what constitutes a nexus. It can, but need not be, a physical presence such as a warehouse, office or franchise. A nexus can be any connection, including participating in a meeting, trade show or expo in the state.
Recently, in an attempt to avoid losing tax revenues, many states have enacted "Amazon laws" which designate online relationships such as affiliations and web advertising as the establishment of a nexus. Having goods pass through a fulfillment center in a state will also create a nexus. Sellers need to carefully consider any possible way in which they may trigger a nexus, and the drain it will cause on their bottom lines. Any vendor with a nexus will need to collect and remit the taxes and submit reports required by local regulations.
Among the records, a seller needs to preserve to fulfill sales tax regulations are invoices, purchase orders, tax-exemption certificates, and freight bills. The software can track many of these, but most companies will still require stout filing cabinets. The administrative burden of monitoring every nexus can be daunting.
What if a company doesn't have the resources to cope with computing sales taxes?
If a vendor doesn't have the time, energy, money or facilities to handle sales taxes, it can choose not to sell in the United States but will potentially miss out on substantial potential sales. It can also produce, store and ship all of its goods from abroad, establishing no connections within U.S. borders. Exclusively offshore sales and fulfillment options can also seriously hamper business growth opportunities.
Another strategy for online vendors is to join forces with a third party possessing the size and computing power to handle all transactions, including charging the appropriate sales taxes. This gambit also has its pitfalls. Online sellers must understand that if they have nexus in a state, they must collect tax on all sales in that state whether they ship them themselves or through a third party.
Massive operations such as Fulfillment by Amazon (FBA) use and possess many warehousing and distribution facilities throughout the United States, producing, except for warehouses in the state of Virginia, a nexus at each location. Amazons' network of online activities may create additional nexuses. A relationship with FBA means that many more customers will be paying sales taxes. A conservative approach for a company utilizing FBA would be to register for sales tax in all the states where Amazon has a fulfillment center to avoid getting caught out.
When the cost of taxes is added to shipping charges, a potential purchaser may decide that it makes more sense to buy elsewhere or not at all. An additional challenge occurs when without notifying the seller, Amazon may not always send items from the same FBA fulfillment center. This uncertainty introduces uncertainty into the setting price points that make a company's products an attractive buy. Large fulfillment centers may also be incapable of providing the custom packaging that will build familiarity with sellers' products and enhance their brands.
Selling through an e-commerce platform that integrates with a smaller fulfillment house offering customized service can deliver savings for both a vendor and its customers. Advanced software on the platform can accurately calculate taxes, and there are fewer physical presences to create a nexus.
Can you find the right fulfillment provider?
Consider Acutrack. We are a leading-edge fulfillment company that works with major e-commerce platforms. Acutrack is sized to present a limited nexus profile and provide personalized services. Our facilities are strategically located to ship efficiently and economically throughout the U.S. and internationally.
Contact us to discover how we can help blaze your path through the sales tax maze.