When lawmakers and pundits talk about online sales tax, they often use the phrase “level the playing field.” When throwing this term around, they generally mean that online sellers should collect sales tax on all sales to any buyer, just like their brick and mortar counterparts do. This is generally followed up by language such as that “online sellers have an unfair advantage” when it comes to sales tax.
So, who is losing in these imaginary scenarios? The vanishing Mom & Pop who own the corner store in Anytown, USA.
What the concept of “leveling the playing field” between online sellers and Mom & Pop leaves out is that the very nature of the U.S. sales tax structure makes it more difficult for online sellers to collect, report and file sales tax than it is for the imagined Mom & Pop at their brick and mortar store.
When asking online businesses to collect sales tax on all online sales, lawmakers and editorial writers are asking a lot more than they realize. Just like everyone else, online sellers understand that sales tax dollars go to pay for state budget items like education and transportation. But it’s unclear that lawmakers understand how difficult dealing with sales tax in the U.S. truly is.
The current U.S. sales tax system is fragmented, complicated and full of pitfalls. This article will examine the many reasons why, as sales tax laws stand today, requiring every online seller to collect sales tax on every sale would create an unfair advantage – for brick and mortar sellers.
Let’s have a look.
Sales Tax Laws Vary Wildly from State to State
There’s no federal sales tax in the U.S. Instead, forty-five states and Washington D.C. all make their own sales tax rules and laws.
This means many aspects of sales tax vary significantly from state to state, including:
- Sales tax rates
- Products subject to sales tax
- Who is required to collect sales tax
- Sales tax filing frequency
- Sales tax due dates
Collecting Sales Tax: Brick & Mortar Sellers Charge One Tax Rate while Online Sellers Contend with Multiple Rates
Each state makes their own sales tax laws, and this includes sales tax rates. A handful of the states with a sales tax have just one statewide sales tax rate. For example, if you walk into a corner store anywhere in Connecticut and buy a taxable item today you’ll pay 6.35% in sales tax on your transactions.
But most states allow local areas – cities, counties, and other special taxing districts (transportation, waste management, etc.) – to also levy a sales tax. That’s why, as a consumer, you’ll pay 6% in sales tax on a purchase from a corner store in suburban Marietta, Georgia, but then drive 20 minutes to Atlanta and pay 8.5% in sales tax on the same item.
For brick and mortar store owners, collecting sales tax is simple. They just determine the rate at their address and collect the same amount of sales tax from every customer who walks into the door.
For online sellers, this is just the first in a series of sales tax complications. In eCommerce, your customer’s “ship to” address is considered the point of sale. An online seller who ships a product to a buyer in Marietta, Georgia would charge the 6% Marietta sales tax. If they ship the same item to a buyer in Atlanta, they would charge the 8.5% sales tax.
That is, unless the buyer just has an Atlanta address but actually lives outside the city limits in Fulton County, where the sales tax rate is 7.75%. And these examples cover just two transactions. A high-volume online seller may be making thousands of sales per month, and they’ll need to know the correct sales tax rate to charge on each sale.
Beginning at the point of sale, sales tax collection is already vastly more difficult for online sellers than for brick and mortar sellers.
Online Sellers are Subject to Multiple States’ Laws
In the U.S., all merchants are required to collect sales tax from buyers in states where they have “sales tax nexus.” Sales tax nexus is just a legalese way of saying a “significant connection” to a state. (You can read what each state’s laws have to say about sales tax nexus here.)
The owners of a Mom & Pop brick and mortar store would only be required to register for a sales tax permit, collect sales tax, and file periodic sales tax returns with the state where their store is located.
Currently, online sellers with nexus in a state are required to collect sales tax from buyers in that state. This means they may already be filing multiple sales tax returns multiple times per year. But if the online sales tax proponents got their way, online sellers would be required to collect sales tax from buyers in every state, no matter if they had any kind of nexus tie to the state. This would mean potentially filing sales tax returns in all forty-five states (plus D.C.) with sales tax, plus, in a handful of states, filing local sales tax returns.
Once again, requiring online sellers to collect sales tax on all sales isn’t leveling the playing field. It’s an unfair advantage for brick and mortar sellers.
Filing Sales Tax: Simple for Brick & Mortar Sellers, Tough for Online Sellers
The next set of challenges online sellers face comes when it’s time to file a sales tax return and remit the sales tax they collected to the states.
When to File Sales Tax Varies from State to State
Since there’s no federal sales tax, online sellers must file sales tax with individual states, on each state’s timeline.
States assign each seller a filing frequency – usually monthly, quarterly or annually depending on sales volume. The general rule of thumb is the more sales tax a seller collects in a state, the more often they are required to file a sales tax return and remit sales tax to the state.
These deadlines vary. Most states set the due date on the 20th of the month after the taxable period ends, but others set the due date on the final day of the month, or the 15th, or some other date. Some states also have different due dates for filers with higher volume.
Brick and mortar sellers deal with one state and one set of state sales tax deadlines. Online sellers, if they were collecting sales tax from every buyer, would deal with all states and their sets of deadlines.
Here’s an example of a potential sales tax calendar for an online seller:
- Monthly California sales tax filing due on the final day of every month
- Monthly sales tax filing to Indiana a due by the 20th of the month if the total collected is over $1,000 or by the 31st of the month if the total collected is $1,000 or less
- Quarterly sales tax filing due to Georgia on the 20th of the month
- Quarterly sales tax filing due to Florida on the 20th of the month, but, per Florida rules, the EFT payment must be in their bank account by the 20th of the payment is late and a $50 fine is levied
- Annual sales tax payment due to Vermont on the 25th of the month
The above example is a hodgepodge of dates and filing frequencies for online sellers to keep up with, and it only accounts for five states.
The Sales Tax Filing Process is More Cumbersome for Online Sellers
When a brick and mortar store files a sales tax return, they simply have to calculate and tell the state how much sales tax they collected from buyers in the spot their store occupies.
Online sellers, unless they are based in a handful of “origin-based” sales tax states (more on that here), are required to break down the sales tax they collected by each city, county and other special taxing district in a state. Done manually, this process could take hours. And remember, it means knowing if your customer lives in the city limits, or if you collected transportation district tax.
And then there are the states that have a double standard for in-state vs. out-of-state sellers. In Texas, for example, in-state sellers only have to collect a single sales tax rate. This makes sales tax filing simple. But out-of-state sellers charging sales tax to buyers in the state are forced to collect sales tax at each buyer’s “ship to” location. In other words, Texas and states like it want out-of-state sellers to collect sales tax, but they literally make it more difficult for these sellers to comply.
When it comes to filing a return, brick and mortar sellers once again have the upper hand when it comes to sales tax compliance.
Brick and Mortar Sellers ARE Online Sellers
And the very last thing lawmakers get wrong is the assumption that Mom & Pop and online sellers are enemies. In many cases, Mom & Pop are selling online, too.
I get the feeling that lawmakers think that an online sales tax would save wholesome Main Street stores against faceless internet sellers. But nothing could be further from the truth. Selling online is a low-overhead way for people to go into business for themselves. Online seller Kat Simpson’s eBay business became her family’s sole support after her husband became disabled. Entrepreneur Cynthia Stine started her business on Amazon with literally her last $200. Even many brick and mortar stores have branched into selling online to gain a whole new, global audience.
Mom & Pop own brick and mortar stores, but they are just as likely to be online sellers. When lawmakers propose legislation like the Marketplace Fairness Act or the Remote Transaction Parity Act in the interest of saving the economy, they do so without understanding what they’re doing.
They’re not helping Mom & Pop – they’re hurting everybody.
States see non-taxed online transactions, and feel like they are missing out on the revenue they need in order to pay for schools, infrastructure and other budget items. There does need to be an easier way for online sellers and states to work together. But while the U.S. sales tax system is as complicated and fragmented as it currently is, asking online sellers to collect sales tax from every buyer is unfair to online sellers.
To sum it up:
Do you have questions or something to say about sales tax compliance? Start the conversation in the comments section.