Internet Sales Tax Sales Tax 101

“Notice and Report” Backlash: Should online retailers comply?

by Jennifer Dunn

Notice and report or collect sales tax - what should online retailers do?

This year was the first year that some U.S. consumers found themselves with a new type of tax form in their mail (or email) boxes. Some states have passed notice and report laws, which require online retailers to either collect sales tax or send buyers an annual notice reminding them to pay “consumer use tax” on their purchases. Consumer use tax is due to a state when a buyer buys an item tax free for use in that state.

A few weeks ago, I fielded a comment on this blog from an eCommerce buyer who had received a notice from an online retailer stating that they were required to pay consumer use tax.  This commenter was livid that the retailer hadn’t just handled the sales tax in the first place, and they vowed to never again buy from that retailer. I shared that with the team here at TaxJar and that made us all wonder if other online sellers who choose to comply with notice and report laws rather than collecting sales tax would face similar customer dissatisfaction.

Well, apparently that wasn’t the only strong reaction to these new notifications. The Hartford Courant recently reported that California-based electronics retailer Newegg faced backlash from Connecticut customers after complying with Connecticut’s notice and reporting requirements.

In this case, Newegg shared 3 years of consumer purchase history with the Connecticut Department of Revenue, then the state taxing authority sent notices to consumers requesting use tax on the purchases for which they did not pay sales tax. Facing perplexed and angry customers, Newegg issued and apology and has stated that customers facing these use tax obligations should contact them before paying. Newegg has also announced that they will collect Connecticut sales tax from Connecticut buyers at the time of purchase going forward.

Sales tax notice and report requirements are a completely new concept as of 2018. While consumer use tax is not new, the amount of U.S. consumers doing a large part of their shopping online is. And many states don’t enforce consumer use tax, so a lot of consumers weren’t even aware that they should have been setting aside that money to pay on their state tax forms at the end of the year. And, of course, no one likes getting an unexpected tax form in the mail, especially when that tax form says the equivalent of “Hey, you now owe money to your state government!” It stands to reason that Newegg and other retailers who choose to “notice and report” rather than collect sales tax at the time of purchase will face some backlash.

Should online retailers comply with notice and report laws, or just collect sales tax?

As usual when it comes to sales tax, the answer is: it depends. You know your business and customers best. Second, it’s up to you to determine how much collecting sales tax vs. complying with state notice and report requirements will cost your business.

Here’s a back-of-the-envelope comparison of collecting sales tax vs. complying with notice and report laws:

Collecting sales tax

The pros of collecting sales tax rather than complying with notice and report laws – U.S. consumers are accustomed to paying sales tax when making a purchase, especially now that eCommerce giant Amazon collects sales tax in all states. Further, most online shopping carts and marketplaces make it fairly simple to turn on sales tax collection in a new state. And, if you already collect sales tax (as most product-based companies do) then this means simply adding another state onto an existing administrative task.

The cons of collecting sales tax rather than complying with notice and report laws – Collecting sales tax comes with compliance costs, such as the time it takes to set up your online shopping carts and marketplaces to collect sales tax in a new state, and the time it takes to file a sales tax return. Fortunately, sales tax automation technology like TaxJar can help with that.

Complying with Notice and Report Laws

The pros of complying with notice and report laws rather than collecting sales tax – I’m struggling to find a pro here, but maybe your business would rather take the time to comply with notice and report laws rather than register with the state and collect sales tax. If you have chosen to comply with notice and report requirements rather than collecting sales tax, I’d love to hear your reasoning in the comments (and that can be anonymous, of course!)

The cons of complying with notice and report laws rather than collecting sales tax – Notice and report laws are a lot of work, and each state’s notice and report laws are slightly different. Not only are you generally required to send notices to your customers and the state department of revenue at the end of the year, you are also generally required to send a transactional notice with each and every sale you make to a customer informing them that they will owe use tax on the purchase, and to change your website to ensure customers know they will be required to pay use tax. And as we’ve seen with the Newegg news above, customers don’t always take kindly to being told they need to pay what they see as extra taxes, even though they technically do owe those taxes to the state.

We want to hear from you. Are you on the hook to comply with new notice and report laws? (You can see a list of notice and report laws by state here.) If so, will you start sending notices to your customers, or will you instead register for a sale tax permit and begin collecting sales tax? Start the conversation in the comments!

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