A few years ago, 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 the 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 (there’s a state-by-state chart at the end of the PDF). 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.
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. Because of this, states are getting more aggressive towards online sellers about sales tax.
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. 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. If you collect sales 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.
What next?
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. If you're dealing with significant back exposure, a Voluntary Disclosure Agreement can often limit how far back a state looks and reduce penalties.
Putting your head in the sand doesn't make sales tax go away, it just makes the bill bigger. Not sure how exposed you actually are? Take our free Sales Tax Risk Assessment, 20 quick questions, about five minutes, for a personalized read.
Frequently asked questions
How much can unpaid sales tax actually cost my business?
For many of our clients, six figures or more. If a state audits you and finds you should've been collecting, you owe the full tax amount out of your own profits, plus interest and penalties on top.
Is it illegal to collect sales tax before I'm registered in a state?
Yes. Collecting sales tax you're not registered to collect, and not remitting it, can be treated as fraud. Only turn on collection in states where you're actually registered.
Should I just set up my channels to collect sales tax everywhere to be safe?
No. If you turn on collection in every state, you're now obligated to register and remit in every state, whether or not you actually have nexus there. That turns a manageable problem into a much bigger one.
Why are states getting more aggressive about sales tax enforcement?
Because more retail has moved online, states are losing the sales tax revenue they used to collect from brick-and-mortar stores, and they're actively working to get it back, including suing 3PLs and marketplaces for seller data.
What should I actually do if I think I have unpaid sales tax exposure?
Figure out exactly which states you owe in, register in those states, set up your channels to collect correctly, and put a plan in place for remitting. Ignoring it only makes the eventual bill bigger.
Deal with it before it deals with you
If you'd rather hand this over to professionals, our sales tax team does this every day and is happy to handle it for you too.
