Selling Bargain Books Online and Collecting State Sales Tax
December 12, 2018
Up until recently, selling bargain books online and collecting state sales tax from those purchases was a fairly straightforward endeavour. The law as established by the Quill Corp. v. North Dakota Supreme Court decision of 1992 ruled that states could not collect sales tax from purchases of its residents where the out-of-state vendor did not have a physical presence in that state.
In 2016, the state of South Dakota passed Senate Bill 106 with the goal to collect sales tax from out-of-state vendors if those vendors’ sales exceeded (annually) US $100,000 or 200+ transactions to its residents. The state sent out notices to four of the largest vendors selling into South Dakota that were not already collecting sales tax: Wayfair, Overstock.com, Newegg, and Systemax. Systemax decided not to fight South Dakota and started collecting sales tax. The other three vendors, however, did not begin collecting sales tax. The only way the state could enforce its recently-passed legislation and lawsuit against Wayfair, Overstock.com, and Newegg was to ask the Supreme Court to rescind the 1992 “sales-tax-only, physical-presence requirement” of Quill.
On June 21, 2018, the majority opinion of the Supreme Court written by Justice Kennedy determined that the physical-presence rule of Quill was “unsound and incorrect” and overruled it. Justice Kennedy wrote that “the Internet’s prevalence and power have changed the dynamics of the national economy,” stating that at the time Quill was decided, revenues for mail order products were around US$180 billion, while e-commerce retail sales in 2017 were estimated at US$453.5 billion.
States are now free to create their own legislation to force out-of-state vendors to collect retail sales tax for goods sold to the residents of their state. As of November 1, 2018, 23 different states have standing tax laws requiring taxation of Internet purchases.
So as not to overburden interstate commerce, many states have set thresholds based on annual receipts or the number of transactions per year by a vendor after which sales tax needs to be collected and remitted.
Impact to Your Business
So, what does this mean for your business today? Unfortunately, it can get quite complicated from here. If you are selling and shipping into states which you don’t have a physical presence in, you now need to collect state sales tax if you exceed the thresholds stated above and react to new thresholds coming from more states. Your “annual receipts” into a state include all retail channels, including your own website and those made on your behalf like 3rd-party marketplaces. In some cases, if you are wholesaling into a state, these sales also count towards your annual receipts and/or transaction count.
There are thousands of different tax jurisdictions across the US and in many cases, you need to collect and file for these individual jurisdictions, not just at the state level. If selling on 3rd-party marketplaces like Amazon, some of these marketplaces do collect and remit sales tax on your behalf, but only in a handful of states where they have been legislated to. Some 3rd-party marketplaces provide facilities to collect tax, but others do not and sales tax must be taken from the proceeds. Shipping in some states is considered part of the sales transaction and therefore taxable; in others, it is not. Books by and large are taxed at the same rate for most states, but some states have lower or no tax for certain types of books like children’s educational and Bibles. Each state will have its own filing rules and schedule you must adhere to, and a few states have compliance dates from over a year ago (Massachusetts 10/1/2017).
Very few companies will be able to comply in such a short time for such an involved implementation. Each state has its own registration process and you might be best to hire on a tax expert to assist in this endeavour. Most companies will reach out to a 3rd-party provider like Avalara or TaxJar and use their services for the collection and remittance of state sales tax. If your website is hosted on a site like Shopify or Bigcommerce, plugins are available to simplify the process of collecting sales tax.
To conclude, take the necessary time and consult with your accounting firm before you proceed so you can ensure you have all the information and advice you need. Evaluate your requirement to collect sales tax on a state-by-state basis, research and select partners to help you become compliant, and stay on top of new state legislation, as the dust has yet to settle on this matter.
Bill Van Vliet