Sales Tax 101

Sales Tax from the States’ Point of View

by Jennifer Dunn

Sales Tax by State

Sometimes when I’m talking to online sellers about sales tax, I use the phrase, “It’s helpful to think about it from the state’s point of view.” While we may not always agree – or even think the state’s point of view makes sense! – it really is helpful when dealing with sales tax to “walk a mile in the state’s shoes.” Here are a few sales tax facts that online sellers have to deal with every day, but from the state’s point of view.

States collect a large part of their revenue from sales tax

As of a Bankrate tax report from 2015, over half of U.S. states receive the majority of their revenue from sales tax. This revenue is used to build roads and repair bridges, provide public safety and education, and generally fulfill a state’s financial obligations. It’s no wonder then that states can be aggressive about collecting sales tax when they feel they aren’t getting their fair share.

This is also why states want online sellers who make a large volume in sales to file and remit sales tax payments more often – they want that money sitting in their coffers rather than in your bank account.

State sales tax laws were not written with eCommerce in mind

Though there is some debate about which state passed the first sales tax, we do know that it was in the early 1930’s in response to the Great Depression.  To the lawmakers who wrote those laws, shopping looked something like this:

Main Street Stores

Photo Courtesy of the U.S. National Archives

The wheels of government move much slower than technology, so many states are still struggling to apply laws written for brick and mortar stores to eCommerce. This is why so many sales tax on shipping laws can be hard for eCommerce sellers to understand and follow, and why areas of tax law like sales tax on digital goods are changing so rapidly.

If you find your state’s sales tax laws hard to interpret as they pertain to your business, we recommend speaking with a vetted sales tax expert.

Some items are tax exempt in order to save citizens’ pocketbooks

If you sell online in more than one state, you’ve probably noticed that some states do not consider necessities like food and clothing to be taxable. While this can be a bit of a headache for an online seller when trying to assign tax categories to specific item classes, the state’s intentions were pure. These tax exceptions are designed to help those living in the state make purchases without the added burden of sales tax. This is also why you often see sales tax holidays on necessities like school supplies or severe weather preparedness items.

States often consider enforcing sales tax collection by retailers easier than enforcing use tax collection from citizens

Technically, if a citizen of a state buys an item tax free on the internet and plans to use or consume it in her home state, then she is supposed to pay “use tax” on that item to her home state. There’s generally a line on your state income tax form to remit any use tax that you might owe. Of course, this is almost impossible to enforce. As a consumer, there’s no easy way to keep track of your non-taxed purchases throughout the year.

This is why some states, starting with Colorado, are passing laws requiring online sellers to notify their buyers when they owe use tax on a purchase.

In the state’s eyes, it’s simpler to add to the regulatory burden of an out-of-state business than to enforce existing laws on state citizens. For one thing, if a state’s citizens get angry enough with their lawmakers, they can exercise their rights at the voting booth! Out-of-state retailers don’t have that same recourse.

The U.S. Supreme court recently gave states’ arguments a boost by refusing to hear a case challenging the Colorado law. Long story short, this means that when the law goes into effect, out-of-state online sellers who make more than $100,000 in annual sales in Colorado will be required to notify all of their Colorado buyers of their use tax obligation.

That said, many sales tax experts see Colorado’s law as a gambit to persuade large online retailers with no nexus in the state to collect Colorado sales tax. The thinking is that if they make not collecting sales tax onerous enough, the retailers will give in an collect sales tax. It seemed to work on at least one big online retailer. Amazon began collecting sales tax from Colorado buyers in February 2016. (Though Amazon also announced a fulfillment center in Aurora, Colorado so it’s unclear if it was this law or the future fulfillment center that persuaded them to start collecting.)

In general, states would rather businesses collect sales tax than spend the money and resources themselves to enforce use tax collection from states citizens.

States are sometimes even helpful to retailers!

Some states understand that they’re asking a lot when they ask you to collect and remit sales tax. These states offer on-time filers a sales tax discount. Though these discounts are generally a very small percentage of the tax you owe (generally 1-2%) every little bit helps when it comes to your bottom line!

I hope this post has helped you see sales tax from an entirely new point of view. Do you have questions or something to say? Do you want the state’s point of view on another tricky sales tax issue? Start the conversation in the comments!

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