This week marks the anniversary of our country’s birth. But it also marks the birth of something else: a new sales tax requirement for the commonwealth of Pennsylvania that will affect countless small businesses across the country.
Pennsylvania’s sales tax is not new. But the way it’s collected is. Up until last year, online merchants selling their products weren’t required to collect and pay in-state and local sales taxes unless they had “nexus” in that state, which mostly means a physical location or employee there.
A year ago, the Supreme Court expanded that definition of “nexus” to also include “economic activity.” What does that mean?
It means “a never-ending labyrinth of complicated terminology, numbers and registrations,” says Jennifer Kirby, the owner of Piggyback Treats, a Philadelphia-based e-commerce business that sells its “sustainably crafted goodies for pets” nationwide. “No mere human being can understand it all.”
Kirby, like many other small merchants, have been overwhelmed by the requirements imposed on them as a result of the Supreme Court's ruling. Why? Because there are a lot of different tax rules in this country.
According to a report issued earlier this year by sales tax software provider Vertex Inc., state and local jurisdictions have either initiated or changed 5,886 sales tax rates over the last 10 years. And 2018 alone brought 619 changes. Now it’s Pennsylvania’s turn.
That’s because, effective July 1, Pennsylvania will now require any company selling more than $100,000 worth of product (or 200 transactions) into the commonwealth to collect and pay in sales tax — and file returns. Although some states differ, most experts agree that using these criteria is a good rule of thumb to determine whether your company should be collecting sales tax for its online sales.
Philadelphia will benefit from that rule. New Jersey has had that requirement in place since November of last year. Delaware is one of four states in the country that has no sales tax.
“What small businesses selling online should know is that there isn’t such a thing as online sales tax,” says Scott Peterson of tax software compliance provider Avalara Inc. “The sales tax is the same for someone that is selling over the counter as it is for someone selling over the internet. The one difference now is that when you sell online, your obligations are likely going to be to more governments than they are if you just sold out of a brick-and-mortar store.”
Avalara has a great summary of each state’s requirements here.
So what can small online merchants do in the face of such complexities?
Kirby hired an accountant who had experience with state and local taxes, but unfortunately admits that her accountant can't do it all.
“The complexity of registering in different states is definitely the biggest challenge because every state or city’s website is set up and worded differently,” she says. “It makes things very difficult and costs so much time trying to navigate.”
The good news is that there is plenty of technology to help. Companies such as Avalara and Vertex specialize in this work. E-commerce software providers such as Shopify, Magento and Big Commerce all offer solutions or partner with firms that do, as do online marketplaces such as Amazon and eBay. Many mainstream accounting applications have these features, too.
Sales tax compliance software providers such as Avalara and Vertex stay current with all of the thousands of state and local rates and filing requirements. They integrate with many e-commerce and accounting applications. They perform the grunt work behind the scenes: calculating the sales tax on each transaction, adding the tax to an invoice and then assuming responsibility for collecting and remitting the tax along with filing the necessary paperwork.
It is no surprise that all of this comes at an annual cost.
“Many of these applications have a license that needs to be repurchased each year, and if not, are not updated,” said Bernie Clark the founder of Majux, a Philadelphia based e-commerce marketing firm. “As a result, an e-commerce site with an outdated tax plug-in/module may not have updated their nexus settings or state sales tax tables and will not be collecting state sales tax correctly. Even worse, they may be collecting state sales tax incorrectly in instances where they do not need to.”
Is there a way to reduce this complexity? Although there are many downsides, some are pushing for a national value added tax that’s in effect in many other countries.
But no one sees that happening anytime soon. So for now, small merchants are going to have to do whatever they can to make sure they’re following the law in every place where product is shipped.
“Everything is taxable somewhere,” Peterson says. “And if you only know one state, your world can be very, very rocked by the differences that exist out there.”
Gene Marks is a certified public accountant and the owner of Marks Group, a technology and financial management consulting firm in Bala Cynwyd.