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How Small Businesses Can Prepare for New Sales Tax

(posted: October 17th, 2018)

This summer the Supreme Court ruled that states have the authority to require businesses to collect online sales tax on purchases even if the business does not have a physical presence in the state. This decision has the potential to impact the way small businesses conduct business online, but you may be unsure of how to adapt your e-commerce operations.

First, what does the Supreme Court's ruling on online sales tax mean?

Previously, businesses were only required to collect sales tax in states where they operate physically. Some major online retailers like Amazon were already collecting sales tax nationwide, but many small- to mid-sized businesses were not in order to maintain a competitive edge.

For small businesses with an e-commerce presence, their compliance obligation may increase with every state that now chooses to collect online sales tax. But businesses with a brick-and-mortar-only operation have always been required to collect sales tax and may be grateful that this decision levels the playing field between them and their online competitors.

The good news for online retailers is that it takes time for states to react to rulings like this one and make the necessary changes to enable the collection of a new tax. While some states have been readying their processes in anticipation of the ruling, most will have work to do before enacting any major changes.

What types of regulatory changes should you look out for?

There are five areas small business owners should keep an eye on in the months to come:

  1. Thresholds: Some states already have, or will enact, thresholds above which the tax will be triggered. So, if a business' activity in a particular location is below an ordained dollar or transaction level, they may be exempt.
  2. The Streamlined Sales Tax Agreement: Twenty-four states currently participate in this agreement, which in addition to standardizing some of the supporting tax calculation and submission protocols also provides for free sales tax compliance software for retailers under certain circumstances.
  3. Retroactivity: Some states may be tempted to look to collect these taxes not only going forward, but also retroactively on past sales.
  4. Federal standardization: Policy makers grasp how challenging it will be to stay on top of the multitude of state and local sales tax rules. As such, the Supreme Court ruling may prompt Congress to finally enact a standardized federal policy.
  5. Potential impact on general business taxes: Some states don't levy income taxes on businesses without a brick-and-mortar location within their borders. This decision may spur these states to reconsider that stance given the opportunity for incremental revenue.

How Can You Prepare?

Though some effects of this ruling are unknown at this time, you (or your accounting professional) can take steps to prepare. The very first thing to do is to assess impact, by evaluating where your out-of-state sales come from. This will give you an idea of where to focus your compliance attention. There may also be software solutions available to help with compliance.

E-commerce allows businesses to reach corners of the U.S. that never would have been possible with a brick-and-mortar presence, but now that online channels are a major way that business is done, online sales tax is just one way federal and state legislators will work to regulate the industry. We can expect to see much more of this in the future as unique issues of e-commerce rise to the forefront.

Please contact us for guidance on out-of-state sales tax that is specific to your situation.

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