Why Online Retailers Need to Worry About Sales Tax

By November 21, 2019 Ecommerce Accounting

Recently California hit a Philly area Amazon seller with a $1.6 million sales tax bill. The details are still being worked out in court, but this should be a reminder to online retailers that they need to take sales tax seriously. The states are becoming more and more aggressive and it’s not the kind of thing that goes away if you ignore it. It will only become bigger and bigger until it has the potential to take you down completely. If you have ignored sales tax until now, I’m not judging, but it’s time for you to hear this. 

Online retailers can’t ignore sales tax 

Online retailers are often slammed with so many things that it can be hard to sort through what is important and what is just noise. Marketing methods for example are hyped constantly but come and go like the waist heights on pants. If you tune much of that out it’s no big deal. Sales tax for online retailers is not like this. It’s not just noise. If you have not planned to deal with this, or you aren’t even sure exactly what I’m talking about, I need you to put down whatever you are doing and look me in my eyes.   

This is not the blog article where I go into detail about what creates nexus and how sales tax laws are constantly changing. I’m not going to use the word “regulation” or “compliance” and bore you with tax jargon. You can look up the history of sales tax if you want and track economic nexus laws by state.  All that aside, I want you to understand the risks you face. This is the article where I give you the frank, unvarnished truth.   

Huge sales tax liabilities and penalties can destroy your business 

Why is sales tax such a serious situation for online retailers? You often don’t even know you have a problem until they come knocking at your door, and when they come knocking it’s already too late. They don’t tell you about this when you start your business. And the fact that you didn’t know about sales tax won’t save you from the consequences. The consequences can be dire enough to put you out of business.  We like to call it the fire that can burn your business down. 

If your online retailer business gets audited by a state and they find that you should have been collecting sales tax in their state and you weren’t, they’re not nice. Don’t get me wrong, you’re not going to jail for not collecting, but they will expect you to pay them the sales tax you should have been collecting. For many of our clients, this has been $100k or more. 

If you had known, you could have just set up your channel to collect sales tax at the time of the sale. Then you would have remitted this sales tax to the states, as necessary. Now you must come up with that money out of your profits, plus interest and penalties. Many of our online retailer clients grow very rapidly and have sales tax obligations without realizing it. When the states come for them, the price is high and heavy.  

Ecommerce sales tax

States are getting more aggressive 

Think you can just lay low and the states won’t find you? Think again. With more and more of retailers moving online, states are losing their sales tax revenue and they are anxious to get it back. With the new laws passed around sales tax, each state gets to take their destiny into their own hands on this.   

Imagine if you were a state and suddenly you realized you were leaving millions of dollars of revenue on the table. All you have to do is find online retailers lurking all over the country and enforce sales tax with them. States are suing 3PL’s for lists of their sellers, they are coming after Amazon in the courts, they are like aggressive little bees coming for your tender areas. The more successful you become, the bigger of a target you have on your back. We have case after case after case with our own clients who have had states find them, audit them, and sue them. (Before they worked with us of course.)   

Wait! Don’t collect sales tax before registering… 

Sometimes when online retailers hear this they panic and set their channels to collect sales tax in every state. “I’m saved!” they exclaim, frolicking through the streets in their dainties. But would you believe that they have only made their situation significantly worse? 

You see, not collecting sales tax when you should have may cost you a pretty penny. But collecting sales tax from customers when you aren’t registered in a state may land you in jail. That’s right, I said it. And it’s true. If you collect sale tax and then you don’t remit that to the state, they consider that fraud. If you set up your channels to collect in every state you better be prepared to register, and remit in every state. The costs around the compliance of this are no small thing. It’s one thing to have to register and remit in every state because you have nexus in every state. It is quite another situation to find yourself registering and remitting in every state because you made a rookie mistake.  

Get your online retail business on track with sales tax compliance  

Putting your head in the sand will not make this problem go away and will only increase the chances that you are unpleasantly punished for your follies. The only responsible thing to do is to deal with it. Figure out what states you have sales tax responsibilities in, register your business in those states, set up your online retail channels to collect in the correct states, and have a plan for remitting that sales tax. (Download our 10 steps to sales tax compliance for more detailed help). Hire professionals if you need to, but either way, handle this issue of sales tax pro-actively.