Posts tagged ‘tax’

What’s the best way to collect sales tax online?

If you have an online business, you already have to collect sales tax for at least one state—your home state—and you may soon have to collect sales tax in more states. So what’s the best way to handle online sales tax collection?

While you do have a few options, most of them—with one notable exception—require you to invest significant time and/or resources. Some e-commerce platforms offer sales tax calculators, but you’ll have to manually enter the sales tax rate for each state and local tax jurisdiction in a table and update them any time there’s a change. Or, if you have programming experience or the resources to hire someone who does, it’s possible to create your own program to calculate sales tax.

But the easiest option by far is to use a sales tax management service.

Sales tax management services automatically handle sales tax collection for you. All services calculate sales tax, but some can also create and file your sales tax returns, remit the sales tax collected to states, and manage exemption certificates. If the service has been certified by states, it may also offer indemnification—you won’t be held liable for any errors. Sales tax management services also automatically update any changes to sales tax rates.

These services vary in cost. Most frequently, they charge a software licensing fee as well as a fee for each time your store looks up a tax rate, though some services charge just the licensing fee or just the look-up fee. In addition, some charge for features such as sales tax return filing.

There is currently just one free service available, TaxCloud, which offers the features mentioned above—calculation, remittance, filing, exemption certificate management, indemnification, and automatic updating—at no cost to retailers. Instead, states pay a commission based on the amount of sales tax that TaxCloud helps retailers collect. (Full disclosure: I’m employed by FedTax, the company that created TaxCloud.)

If you’re a Spree Commerce merchant, there’s an extension that lets you integrate TaxCloud with your online store, or you can use Spree’s default tax calculator. Spree’s guide to taxation has more information about sales tax and the Value Added Tax (VAT) often used outside the US.

About the Author

Erin Granville is Communications Editor at FedTax, the proud creator of TaxCloud.
TaxCloud is a free, easy-to-use sales tax management service for retailers. It handles every aspect of sales tax, from calculation to collection to filing—all at no cost for retailers.

TaxCloud can be easily integrated into most accounting, order management, and shopping cart systems. It has been evaluated by states and an independent review board and has been designated one of only six Certified Service Providers in the nation.

Check out the Spree TaxCloud extension written by Spree Community member Jerrold Thompson to integrate TaxCloud with your Spree store.

How will online sales tax collection affect businesses?

Most online businesses already have to collect sales tax on some transactions. If your business has a physical presence in a state with sales tax—even if it’s just your home office—you’re required to collect sales tax from residents of that state.

But Congress may soon expand that by allowing any state to require online businesses to collect sales tax, no matter where the business is located. In fact, three bills to that effect were introduced in the last session of Congress, and a new one is expected to be introduced early this year. We can’t know exactly what the new bill will include, but we can make reasonable guesses based on the three previous bills.

So if you have an online business, what will online sales tax collection mean for you?

Will you have to collect sales tax?

All three previous bills exempted some businesses from collecting sales tax, and the new one is likely to do the same. You will probably only have to collect sales tax if all of the following statements are true for you:

  • You sell to residents of a state with sales tax
  • That state has simplified its sales tax laws as the bill requires
  • That state has chosen to require out-of-state retailers to collect sales tax
  • You do not qualify for the small seller exemption. We don’t yet know how “small seller” will be defined in the new legislation, but the most popular previous bill exempted sellers with less than $500,000 in annual remote sales.

If even one of these statements is not true, you most likely won’t have to collect sales tax.

When will you have to start collecting?

Like the previous bills, the new bill will have a timeline describing when states may receive collection authority—that is, the authority to require out-of-state retailers to collect sales tax. Once a state has collection authority, it can require a retailer in any other state to collect sales tax.

But for most online retailers, the timeline won’t really matter. A customer could be from any state, and if that state has already received collection authority, you’ll have to collect sales tax from the customer.

In other words, you’ll need to be ready to collect sales tax as soon as the first state receives collection authority. You never know where your next customer could be located.

So when will the first state receive collection authority? While we can’t know for certain, it’s reasonable to expect the new bill’s timeline to be similar to those in previous bills.

First, keep in mind that, like every previous bill, the new bill will almost certainly say that a state’s sales tax laws must be simplified before it can receive collection authority. The twenty-four states that are currently members of the Streamlined Sales and Use Tax Agreement (SSUTA) have already simplified their sales tax laws, so they will be the first to receive collection authority.

SSUTA states may be able to require you to collect sales tax on the first day of the calendar quarter at least 90 days after the legislation passes. Which means that you’ll need to be ready to collect sales tax three months after the bill becomes law.

Non-SSUTA states may be able to receive collection authority on the first day of the calendar quarter six months after they simplify their sales tax laws. Note that for non-SSUTA states, the collection authority date is based on when the state simplifies its sales tax laws, not on when the bill becomes law. But again, you’ll need to be ready to collect sales tax on the first collection authority date, likely only 90 days after the bill passes.

The previous bills required states to notify retailers in advance about when they’ll need to start collecting, and new legislation is expected to do the same.

What’s involved in collecting sales tax?

Collecting sales tax is essentially composed of three tasks: calculation, collection, and remittance.

First, you need to calculate the sales tax due for your customer’s location. This means using the state and local tax rates for the customer’s home address and not including tax-exempt items as your customer’s tax jurisdiction requires.

Next, you need to collect the sales tax due. This also includes tracking how much sales tax you collect from each customer on each purchase, so that you can remit the correct amount of sales tax to each state.

Finally, you need to remit the sales tax you’ve collected to the appropriate states through a monthly sales tax return. Keep in mind that if you’ve registered to collect sales tax in a particular state, you must submit a monthly sales tax return for that state, whether or not you’re remitting any sales tax that month.

Fortunately, there are ways to automate each of these steps, including tools that your shopping cart provider may offer and services that handle everything for you. In the next post in this series, we’ll look at the different methods available to make online sales tax collection easy for retailers.

About the Author

Erin Granville is Communications Editor at FedTax, the proud creator of TaxCloud.
TaxCloud is a free, easy-to-use sales tax management service for retailers. It handles every aspect of sales tax, from calculation to collection to filing—all at no cost for retailers.

TaxCloud can be easily integrated into most accounting, order management, and shopping cart systems. It has been evaluated by states and an independent review board and has been designated one of only six Certified Service Providers in the nation.

Check out the Spree TaxCloud extension written by Spree Community member Jerrold Thompson to integrate TaxCloud with your Spree store.

How would an online sales tax law change the current sales tax situation?

Right now, online retailers only have to collect sales tax for states where they have a physical presence. But many expect Congress to change that.

In the previous session of Congress, which ended on January 3, three bills were introduced to give states the authority to require online retailers to collect sales tax, no matter where the business is located. All three expired with the end of the congressional session, but the most popular—the Marketplace Fairness Act—is expected to be reintroduced early this year.

So what can we expect from online sales tax legislation this year?

Any new legislation is likely to include the provisions that all three previous bills included:

  • States that meet certain conditions will have the authority to require out-of-state retailers to collect sales tax
  • States must simplify their sales tax laws before they are granted that authority
  • Small out-of-state businesses will be exempt from collecting sales tax, so that they are protected from any requirements that could be a burden

What we don’t yet know is how new legislation will address the two areas where the old bills disagreed: how states can meet the simplification requirements and how to define “small business.”

Meeting the Simplification Requirements

It’s a near-certainty that states will have to simplify their sales tax laws if they want to require out-of-state retailers to collect sales tax. What remains to be seen is how an online sales tax law will allow states to meet those simplification requirements.

Two ways have been proposed in previous bills. One is simply to list simplification measures in the bill itself and require states to make sure their laws include those simplifications before they can receive collection authority.

Another option requires states to adopt the Streamlined Sales and Use Tax Agreement (SSUTA), a set of guidelines created by states and the business community to make it easier for retailers to collect sales tax for multiple states. It focuses on simplifying and standardizing sales tax rules—so that, for instance, a Snickers bar isn’t taxed as candy in one state and as food in another. The SSUTA rules tend to be more in-depth than the bills’ simplification measures.

The Marketplace Fairness Act actually allowed states to use either method to simplify their sales tax laws, so that’s a possibility for future legislation as well. And the twenty-four states that have already joined SSUTA will probably be among the first to receive collection authority in any case, since they will have already simplified their sales tax laws as the legislation is likely to require.

The Small Seller Exemption

Everyone agrees that small businesses should not be required to collect out-of-state sales tax. Where everyone seems to disagree is what qualifies a business as “small.”

Here’s how the three previous bills set the definition of “small seller”:

  • The Marketplace Fairness Act: Businesses with less than $500,000 in annual remote (out-of-state) sales are exempt from collecting out-of-state sales tax.
  • The Main Street Fairness Act: The Streamlined Sales Tax Governing Board (the administrative arm of SSUTA) determines the “small seller” threshold, currently pegged at $500,000 in annual remote sales.
  • The Marketplace Equity Act: Sellers with less than $1 million in annual remote sales are exempt from collecting out-of-state sales tax. In addition, businesses are exempt from collecting for a particular state if their annual sales to that state are less than $100,000.

If the Marketplace Fairness Act is reintroduced, as most expect, its exemption level of $500,000 could remain intact. However, it’s impossible to know for sure until the new legislation is introduced this year.

It’s important to remember that no online sales tax bill creates a new tax or raises taxes (since sales tax is already due on online purchases). They do, however, create new responsibilities for some businesses. In the next post in this series, we’ll look at what online sales tax would mean for these businesses. And if you missed last week’s sales tax post, make sure to check out Why don’t online retailers collect sales tax?

About the Author

Erin Granville is Communications Editor at FedTax, the proud creator of TaxCloud.
TaxCloud is a free, easy-to-use sales tax management service for retailers. It handles every aspect of sales tax, from calculation to collection to filing—all at no cost for retailers.

TaxCloud can be easily integrated into most accounting, order management, and shopping cart systems. It has been evaluated by states and an independent review board and has been designated one of only six Certified Service Providers in the nation.

Check out the Spree TaxCloud extension written by Spree Community member Jerrold Thompson to integrate TaxCloud with your Spree store.

Why don’t online retailers collect sales tax?

Sales tax is already due on online purchases within the U.S. — but as you probably know, most online retailers don’t collect it. Why not?

It all comes back to location, location, location.

Sales tax is levied by the state, paid by state residents, and — usually — collected by the retailer at the point of purchase. The retailer then sends the sales tax collected to the state.

For most purchases, this system has worked well for over sixty years. But it becomes more complicated when the customer and the retailer are not located in the same state.

No matter what, sales tax must be remitted to the state where the customer lives. Otherwise — if, say, a retailer sends it instead to his or her own state — it’s taxation without representation. Customers are the ones who pay sales tax, and if that tax were sent outside their home states, they’d be paying taxes to support a state where they cannot vote and have no say in how those tax dollars are spent.

So a retailer who collects sales tax must be able to calculate the sales tax due for the customer’s home state and remit the tax collected to that state. No big deal when the retailer and customer are located in the same state, but it becomes more complicated for online and catalog retailers, who can sell to anywhere in the country. To collect sales tax on each purchase, these retailers need to know sales tax rates outside their own states.

Supreme Court Rulings

States have tried in the past to require these retailers to collect sales tax from their residents. Two cases ended up before the Supreme Court, both long before online shopping was a reality: National Bellas Hess v. Illinois Department of Revenue (1967) and Quill v. North Dakota (1992). In both, the Supreme Court said that a state cannot require an out-of-state retailer to collect sales tax unless the retailer has a physical presence in the state, because it would be too difficult.

Fast forward to today: Online retailers, like catalog retailers, are selling to residents of states where they have no physical presence. So the Supreme Court decisions apply to online retailers as well. If they don’t have a physical presence in a state, they don’t have to collect sales tax for that state.

Interestingly, though, the Supreme Court said in its Quill decision that Congress should really be the one to say whether states can require out-of-state retailers to collect sales tax.

Congress has declined to take up the issue until now, but most observers agree that that will soon change. In the next post in this series, we’ll look at some of the ways Congress may choose to address online sales tax and how that could transform the sales tax landscape.

About the Author

Erin Granville is Communications Editor at FedTax, the proud creators of Tax Cloud.

TaxCloud is a free, easy-to-use sales tax management service for retailers. It handles every aspect of sales tax, from calculation to collection to filing—all at no cost for retailers.

TaxCloud can be easily integrated into most accounting, order management, and shopping cart systems. It has been evaluated by states and an independent review board and has been designated one of only six Certified Service Providers in the nation.

Check out the Spree Tax Cloud extension written by Spree Community member Jerrold Thompson to integrate TaxCloud with your Spree store.

  • Join the discussion: How have you dealt with sales tax issues for your e-commerce store?

Taxation Improvements Now Available

We’ve recently made several major improvements to how taxation is handled in Spree. These changes were made at the behest of our community, especially our European friends struggling to have a simple implementation of VAT. After considerable discussion and coding, the changes are now ready for release.

Please see our recently revised Taxation Guide for the complete details. There is also a work-in-progress version of the 1.0 release notes which highlight some of the changes made. This code is available right now on the “edge” and will be part of the official 1.0 release later this month.

Polymorphic Caclulators

There has been significant refactoring to the implementation of calculators. Calculators are now polymorphic and belong to calculable. This will have a non trivial impact on your existing store configuration. After upgrading to Spree 0.9.0 you are likely going to have to make several manual adjustments to the existing tax and shipping configurations. Ultimately we feel this is outweighed by the superior design of the new calculator system which will allow for a more modular design.

WARNING Many of the existing calculator extensions are not yet updated to support Spree 0.9.0. Please check the extension registry to see which versions are supported. Our goal is to backport most of the useful calculators shortly after the release.

All calculators need to implement the following method

def compute(something=nil)
end

The calculator is passed an optional "target" on which to base their calculation. This method is expected to return a single numeric value when the calculation is complete. A value of nil should be returned in the event that a charge is not applicable.

Calculators are also configurable thorugh Spree’s flexible preference system. Default values for the preferences are configured through the class definition. For example, the flat rate calculator class definition specifies an amount with a default value of 0.

class Calculator::FlatRate < Calculator
preference :amount, :decimal, :default => 0
…
end

Spree now contains a standard mechanism by which calculator preferences can be editied. The screenshot below shows how the amounts for the flat rate calculator are now editable directly in the admin interface.

shipping_config

This project is maintained by a core team of developers and is freely available for commercial use under the terms of the New BSD License.

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