How to pay your sales tax for your online store - with Amy Munroe - Sales Tax Specialist
Here we are with Amy Monroe and she is the sales tax Yogi. If you want to know anything about sales tax - and what I discovered it is used.
Amy Debusk Monroe (00:16):
Yes. Use - U.S.E. So most of us when you're a consumer, when you're a buyer, most of us think of sales tax and then on the business side that the twin sister of sales tax USE tax.
Veronica Jeans (00:31):
USE Tax. So that's what I'm going to say from now on just because people don't really know the difference. So what is the latest in sales tax in e-commerce? It is so important and everybody is so confused about what do we have to pay, when do we have to pay it? So what is the newest thing?
Amy Debusk Monroe (00:51):
It's funny - it's still new cosmically speaking, right? But it has been two and a half years, believe it or not, ince the state of South Dakota successfully sued the Wayfair company for having the grand audacity to advertise to South Dakota residents that they don't have to pay sales tax because Wayfair doesn't have physical presence in South Dakota. So because we only have a few minutes, I won't bore our our viewers with the details of the ins and outs of the ruling itself, but two and a half years later, what I can tell you is that there are 45 States in the United States that actually have sales tax to begin with. 45 States plus DC, I guess. And 43 of them, after two and a half years, now have Wayfair rules. Which is to say, economic nexus - meaning that your economic presence in a state is significant enough that the Supreme court said that's basically the same as physical presence in a state. And therefore you have an obligation to collect sales tax from your customers and remit it to the state and local governments where your customers are located.
Veronica Jeans (02:02):
Exactly. So before it was - your company had to be residing in a state to have to pay that sales tax.
Amy Debusk Monroe (02:13):
Mas o menos - it was residing, or you had significant sales presence. So you had a sales force who made visits into a state, or you had an inventory warehouse located in a physical property there. Or if you were in the business of leasing copiers, let's say, you had copiers at customers located around the country, right. You had some sort of physical, tangible thing or person that existed in a state that established a presence for your company.
Veronica Jeans (02:39):
Okay. So, now that is out of the window, we all have nexus.
Amy Debusk Monroe (02:45):
I said 43 of the 45 States now have Wayfair rules. Missouri's is coming. January one, Missouri will have it. And then the only holdout is the great state of Florida. My home state. They have now three times come very, very close to having Wayfair rules. And at the 11th hour, something happens and they decide against it. So given what transpired in the last couple of days, I suspect it'll be a while before Florida has Wayfair rules, but they will be the lone holdout, I guess.
Veronica Jeans (03:19):
I always thought that Texas would be the lone holdout.
Amy Debusk Monroe (03:24):
And on the flip side of that Kansas has the lowest threshold in the country, which is one. Kansas has been bold enough to say, if you sell here, you pay here. So anyhow, you have two and a half years in almost all the States, have Wayfair rules now. But the thing that I caution people about is to not ignore the traditional physical presence rules that came before June of 2018. Because sometimes, especially if you do like fulfillment by Amazon and things like that, even though you haven't crossed a threshold you might have a presence there. Now that said, the other thing of what the latest and greatest in e-commerce is, is marketplace rules.
And what is a marketplace first?
Amy Debusk Monroe (04:26):
So a marketplace facilitator is somebody like Amazon, Etsy and Walmart.
So a marketplace facilitator, the States have decided, is because they're so involved in the e-commerce, they handle customer service, they process payments, they take returns, oftentimes deal with shipping and receiving, control inventory locations, that kind of thing. Again, we have 42 States that have marketplace rules now. So Florida and Missouri don't. Missouri's is coming in January and Kansas, the States that says - you have one sale, you have nexus - they don't have marketplace rules and I don't see anything on the horizon.
What does that mean?
Amy Debusk Monroe
So what it means is if you only sell through a marketplace, or even, I guess, if you sell through a marketplace and your other e-commerce sales. Anything that's conducted through that marketplace, the marketplace company that facilitator actually bears the responsibility of collecting and remitting sales tax on your behalf.
Veronica Jeans (05:28):
So in actual fact Facebook is now marketplace as well.
Amy Debusk Monroe (05:34):
Yeah, they have Facebook marketplace, but their rules on marketplace, last I checked anyway, were more about person to person, more like garage sale kind of thing.
Veronica Jeans (05:47):
No, I'm not talking about the marketplace. In Shopify you have a Facebook shop.
Amy Debusk Monroe (05:58):
Oh that is different.
Veronica Jeans (06:00):
So if you went directly on Facebook, you can sell directly on Facebook. The finance goes through Facebook. You do the shipping still. So it's similar to what Shopify is. So it's really a shopping platform, but it is a marketplace. So I don't know what the difference would be.
Amy Debusk Monroe (06:22):
They're towing the line there because Shopify is not yet classified as a facilitator. And I think the keyword is facilitation, right? Because if you look through the rules and California actually recently gave some great clarifying advice on all of this and they clearly defined marketplace retailer. So that's your customers, your clients, those are the people who are selling goods. The marketplace facilitator is the platform on which the marketplace retailer sells their goods.
Veronica Jeans (06:55):
Sells their goods, right?
Amy Debusk Monroe (06:58):
Correct. So it's the word "facilitator" that's really critical. Just payment processing I don't think yet is enough to cross that threshold. What it really comes down to and where Amazon kind of led the parade on this was the customer service aspects - shipping and receiving, facilitating returns, that kind of thing. And I think that's where these rules are really coming from, but just the act of payment processing, I don't think gets us there quite yet.
Veronica Jeans (07:28):
Yeah. So here's a new thing happening on Shopify. They are becoming a .?????????. where you can actually your place your products and they will the fulfill products.
Amy Debusk Monroe (07:43):
Well that's going to be awesome because, and also weird. Like I said, 43 States out of 45 have Wayfair and 42 States have marketplace. What got confusing was one came before the other and you had all these retailers who were only selling through Amazon, but because they were awesome had crossed thresholds and so they registered and filed. Then all of a sudden marketplace rules came along and they were like, well, crap now, what do I do? Do I de-register as an individual retailer, etcetera. And that's the thing to pay attention to is that some States do require dual registration. You have to register as, your own retailer and then basically file a return periodically that says, here's all my sales, but Amazon did it for me.
Veronica Jeans (08:35):
So they know what, which one Amazon does and which one you should be doing. But, does the sales on Amazon and that you do on your retail store a combination?
Amy Debusk Monroe (08:50):
It is. Two things - you either sell wholesale, let's say you do some B2B work. Your combination of wholesale and retail are your economic nexus threshold. And so that's inclusive of all platforms. And also if some of the goods that you're selling say clothing, for instance, (in a couple of States, there are five or seven States where clothing is exempt up to a certain dollar amount) and you also sell, I don't know, widgets, the combination of things, even though the clothing might be exempt in New York, are your threshold. And the only time that's not true is if 100% of your sales are wholesale or otherwise exempt somehow. In which case, those don't count against you. But as soon as you have wholesale, plus $1 of retail, everything gets grouped together.
Veronica Jeans (09:49):
And then drop shipping. A lot of people have drop shipping.
Amy Debusk Monroe (09:54):
So drop shipping is fun as an online retailer, and that's basically where a third party is handling delivery to your customers so that you don't have to manage your own inventory. Awesome sauce. Right. Makes barriers to entry great for e-commerce folks. And now with marketplace, that gets a little more complicated. And so if you sell all your stuff on Amazon, right? So from a sales tax point of view, you're largely covered on the sales tax compliance side, but your 3PL who's doing your fulfillment for you and doing your drop shipping says, that's cool, but I need a resale certificate on our part of the transaction so that I don't have to charge sales tax to you. And you say, well, I'm not registered in a state. How am I supposed to give you a resale certificate? And so there are new and developing rules around that.
Amy Debusk Monroe (10:48):
So some States like New York say, well, we don't really care about the marketplace parts or the drop shipping part. The resale certificate rules are the same. However, in New York you can provide a resale certificate with a non New York seller's permit number on it. So you're still covered. In California they actually have a special form that says: "I'm not registered in California, I only sell on marketplace and here's the backup paperwork". And then there are some States that say: "So sorry. so sad - either register here for a seller's permit or pay tax to your drop shipper". So you've got to take it one state at a time.
Veronica Jeans (11:34):
So what happens if you are drop shipping and they charge you the tax?
Amy Debusk Monroe (11:43):
You pay the tax and it eats into your margin on your profits.
Veronica Jeans (11:46):
Exactly right. So I've had different scenarios and I didn't I really think about it.
Amy Debusk Monroe (11:57):
You would have to be registered as a retailer in the state. When you go to file your sales tax form, there are some States that do have a "credit for sales tax previously paid" kind of thing. So net out the difference. But honestly it just eats into your margin.
Veronica Jeans (12:15):
So what if somebody by accident charged sales tax, they're under the limit. They charge sales tax (the customer obviously pays it) but for a state that they're not in - what do they do with the $2 and 38 cents?
Amy Debusk Monroe (12:39):
Give it back to your customer and say: "Oops Sorry". The money's not yours, you're just a conduit. And $2 and 50 cents, oops, nobody's going to go to jail for that, but $40,000 in tax collected and not remitted, you're going to go to jail for that.
Veronica Jeans (12:56):
Yes, and I mean, most small business owners might think - Oh my Lord, they're going to come off to me and they're going to penalize me and blah, blah, blah. You know? So I just wanted to clear that one up.
Okay, so the next one is, watching out for traditional nexus rules that supersedes Wayfair.
Amy Debusk Monroe (13:18):
So that's basically what we talked about before - physical presence. So even though you might not have crossed economic thresholds, just make sure that you're,??????? following up.
Veronica Jeans (13:30):
And who your salespeople are as well.
Amy Debusk Monroe (13:33):
Correct. Now salespeople do get a little bit of a pass, right? Like you can go into a state depending on the state's rules, anywhere up to like three times in a 12 month stretch. And you're still okay. If you go to a trade show, things like that, you're still okay. If you're providing services though, like computer repair or something like that, that's pretty involved and you're sending people out into the field for that. That's a nexus creating kind of thing.
Veronica Jeans (13:59):
Really the bottom line is if you are earning money in another state, that is the rule. You have to pay attention. So we're nearly done with 2020. So for 2021 we know what's happening with Florida.
Amy Debusk Monroe (14:25):
So Missouri is the last state that's ???????? going to happen and they're coming in January
Veronica Jeans (14:29):
What else is going to happen?
Amy Debusk Monroe (14:33):
Hopefully further clarification now that we have marketplace rules everywhere, they're going to have to pick apart the, whether you're registered or not, who, where the paperwork goes, drop shipment, resale. Like I expect some, filtering out of some of those rules and further clarification. The biggest thing we're seeing is if you have crossed the threshold - register and file - don't wait. Early on in Wayfair, you could kind of use Wayfair as cover to get yourself square with the state. But we've seen three States in particular who are coming back after tax payers register. And they're being extremely aggressive and saying: "That's cute, you registered in May, but our threshold started last October. Show me what you got". And those are Massachusetts, Maine and Wisconsin. And I expect in a post COVID world, hopefully we're post COVID at some point, the States have a lot of revenue to make up for and we expect that aggression to continue.
Veronica Jeans (15:34):
You got to think about how e-commerce has taken off and the States are losing that money that would have gone into the coffers to fix bridges and streets and whatever.
Amy Debusk Monroe (15:49):
Put kids through school, all kinds of stuff.
Veronica Jeans (15:51):
So I have one question. Hopefully we are preparing our taxes already and then 2021, we're going to be looking back and saying: "Okay, we did go over the threshold in this state". ????????Hopefully we went over the threshold. That person will be very, very happy, but yeah?????? So in 2021 they'll go and register and say: "Hey, I've gone over the threshold. They just report it and they give them the money.
Amy Debusk Monroe (16:28):
Correct - And again, each state has different rules. Like New York says the transaction immediately following crossing the threshold, you registering pay. New York can do that because their registration is instantaneous and it's free. You can do it in about 20 minutes on your own on the New York state website, In Florida it's done online, but they take three business days. Other States like New Mexico, there's a whole secretary of state kind of thing you got to go through and it takes a couple of weeks. And then some States say you have until like the quarter following the quarter in which you cross. So every state's a little bit different that way. I'm actually putting together a kind of a cheat sheet for all of that that I'm going to drop for your crew here for this summit. So we'll have that available. But yeah, every state's different. That's why I'm employed.
Veronica Jeans (17:22):
It is so confusing when I saw it the first time. So we had transactions and we have the threshold - what's happening with that?
Amy Debusk Monroe (17:37):
From the Supreme court ruling, it was 200 transactions at a hundred thousand dollars in revenue. Some States were - "and" - and some States were -"or" . Some States have gone higher. Some States are rolling back. Many States have gotten rid of the transaction count, which is awesome for like the really small businesses that are just kind of starting out. Now again, if you cross the 200 and you registered, and then the state got rid of the 200 and you're like, great, thanks for that. So then you kind of have a choice of either de-registering or just keeping on keeping on. So again that'll be in the cheat sheet too what the thresholds are. Places like New York, California, and Texas it's half a million. So if you've crossed those thresholds good on you. And then places like, I think it's Arizona, they started at 200 and they're rolling back. And I think coming in January, it's going to drop to a hundred. And then of course there's Kansas.
Veronica Jeans (18:41):
Do you think the rules will stay? Every year with taxes there are different rules. They would be adding then taking away - would the same thing happen with sales tax that they keep changing every year? What do you think? What's your gut feeling?
Amy Debusk Monroe (18:57):
If you'd asked me that question prior to June of 2018, I would have said: "Nothing's changed in 30 years. Why are they going to start now?" But I'll tell you, the Supreme court ruling did not give the state's carte blanche to just do whatever they wanted to, but that's exactly what they have done. And until somebody challenges them again, this is what it's going to be. And like I said, I hope there's just clarification. And as more and more platforms become marketplaces, that's actually really good for e-commerce. If Shopify gets to that level, that's like everybody, right. And that really covers a lot of ground. And that's going to make everybody's lives, I think, a lot easier.
Veronica Jeans (19:38):
Exactly. Then you don't have to worry about sales tax. So what would you do if you see you are getting close - maybe I should back up. So are there two apps, right?
Amy Debusk Monroe (19:55):
There's more than two, but I think the most common household names and the most low cost opportunities for those starting out - TaxJar and Avalara. But you know, there's Vertex and Sabrix, and I think ????? ENY ?????has one. PWC has one. There are a lot of options and even QuickBooks online now has some sales tax functionality built into it a lot like Shopify. So depending on your sales volume, your own time, patience and expertise, there's a long way you can go before paying a lot for like an add on to your accounting software. But honestly, if you can handle it in your margins, if you can handle it in your business - you know, profit first - then definitely look to somebody like TaxJar and Avalara. Either just for the filing part, just for the monthly rate files or if your volume is really ticking up and you're selling into places that have state and local complications like Texas, New York, Colorado, having something that in real time can do the calculations of the tax for you is definitely the direction to go. That top tier of service though really kicks in around a million dollars in annual revenue because that's where the cost benefit really kicks in. It's just worth paying for. And it's also really the only time at which those platforms want to talk to you.
Veronica Jeans (21:20):
Exactly. I know in Shopify they now have the reporting, so you can quickly see you're reporting on your sales tax but also on where you selling in each state. They are evolving all the time. As you know, I wrote the book and I've updated the book and it's going into print in about two weeks. I can actually update it already. It's just an ongoing, thing, but the cool part about it is, is that they are listening to the customers and that they're updating these things to make things easier for people that have e-commerce stores.
I've got a couple of questions. We already talked about when they should use TaxJar or Avalara. But if they have any questions about sales tax, they join Amy's sales tax Yogi group, right?
Amy Debusk Monroe
Yeah. And then also she's in my group as well. So you can ask any questions that is besides the virtually e-commerce group. This is my e-commerce success group.
Amy Debusk Monroe (22:43):
Just make sure that you tag me so that it actually pops up ?????????
Veronica Jeans (22:44):
Exactly. So you've always got to tag because whatever question you ask, it'll pop up for Amy. And because there are always, always always questions. And I know that you have no problem talking to people and helping them with sales tax. The amount of times I gone: "Amy!". I can explain it, I understand income tax, I understand sales tax. It is just more complicated than what I've ever learned and you are in the trenches every single day. . Tell me about one example of a really complicated situation. I am thinking about the bottles thing ........
Amy Debusk Monroe (23:29):
Oh, well that, yeah, that's a little bit of a, a different tax type with the recycling fees and all that fun stuff. Oh my gosh talk about a lack of standardization and lack of transparency and inconsistency across the board. There are two clients right now that kind of popped to mind. One we've touched on with the drop shipping and then the intricacies between direct to consumer versus the marketplace platform sales and the paperwork required to support resells certificates with your drop shipper. So that's pretty complicated. And then, four party drop shipping scenarios get messy very quickly. And then we have a client recently who used to be in the live event space and then COVID and so they quickly pivoted very beautifully pivoted and went to online streaming.
Amy Debusk Monroe (24:19):
And then the challenge that they're having is, you know, they were registered in like 25, 27 States or something where live events are subject to sales tax. And then they, when they transitioned over to streaming, there are like seven of those States where they were filing for live events where they no longer need to, but then another seven or so States where live events aren't taxable, but str