Online sales tax has become a major issue lately.
The pandemic has been a boon for online sellers, but it’s also become a challenge because of increased sales tax liability.
One side effect of the pandemic is that states are losing massive amounts of revenue. Consequently, they are trying to recoup losses by aggressively going after online sales tax, especially from remote sellers.
It is important to pay attention to this because as the states become more aggressive, your chances of being audited increase. And it’s not the states’ responsibility to prove you’re in compliance…that’s YOUR job.
Through our research, we’ve found five main methods states are using to track down and collect online sales back-taxes.
These methods are:
- Partnering with Amazon
- Questioning registration dates
- Purchasing lists of online sellers
- Sharing info on online sellers with other states
- Increasing auditing resources
We’ll go into more detail below, along with identifying which states are doing this.
It’s very important to get clear on where you have nexus, so you can be registered correctly. For more information on where you may have sales tax nexus, watch this video. You can also watch a video that covers more of the info in this blog here.
Partnering with Amazon
After Wayfair v South Dakota in June 2018, states have the right to require online sellers to pay sales tax when they have nexus in their states.
One of the ways California and Washington are doing this is by going straight to Amazon. Legally, Amazon must give them their lists of online sellers, and when they started holding inventory in those states.
They check those lists carefully to see which sellers have not been filing sales tax. Then they send sales tax demand letters to those sellers.
California is doing this very aggressively. If you’d like to read more about this, here is a great article we found.
Questioning Registration Dates
Several states are aggressively auditing sales tax registrations and questioning registration dates. They want to know if your sales passed their threshold before you registered so they can recoup any back taxes.
You need to be mindful this. Registrations may be subject to audits if they put a future Effective By date instead of a historic date.
For example, let’s say you register in South Dakota to remit sales tax effective January 1, 2021. The state may come and ask you to prove that your sales didn’t pass their threshold before that date. If you can‘t, they will expect you to cough up the back taxes.
So, which states are doing this most right now? We are aware of South Dakota, North Dakota, Wisconsin, and Maine.
Purchasing Lists of Online Sellers
A couple states – Utah and Connecticut, specifically – purchased lists of online sellers. The intention is to question sellers to see if they have economic nexus or not. If so, they want to find out if sales tax is owed to the state.
Utah slowed this down during the pandemic, but they’re ramping it back up again.
The intention with this method is the same. Your registration must match up with when you got nexus in that state or you’ll be charged back taxes.
Sharing Info of Online Sellers with Other States
This one isn’t formal, but it is starting to happen, typically in the Southeast and Midwest. It’s due to alliances and information-sharing between states.
How it works is that states share information with each other. If you get audited by one state, the neighboring states may decide they should investigate and audit you, too.
Increasing Auditing Resources
Lastly, states are dumping more resources into sales tax compliance so they can go after online sellers.
The states doing this the most are Michigan, New York, and Texas. They have lots of resources available to send out auditors to go after remote sellers for back taxes.
This is all something to consider when you’re figuring out your nexus and which states to register in.
For help with your sales tax compliance, you can view our services and reach out to us here.