released May 18, 2021
(recorded May 12, 2021) - 50 minutes
Introduction and caveat for today's show
Before we get into this topic we need to advise you that we are not certified public accounts, and we are not licensed as tax advisors at all. The information we are about to share with you changes all the time, and you are required to check your own local tax laws. There is no forgiveness if you do this wrong, and if you do it wrong, there will be penalties assessed by your government.
The only reason we know a bit about this is because we have to keep our software platform up to date with the different potential tax laws. Therefore, we pay attention to them and we modify our software as needed to make sure it will work for any state and any country.
We have to warn you that most accountants will have no clue when it comes to internet sales tax responsibility. The only accountants that seem to know this stuff are the ones who have experience with sales tax rules in every state, and how they apply when you cross a border.
We will explain a lot of different tax scenarios. Some combination of these scenarios will probably apply to you in your state and country, but then again, none might apply.
Everything we mention today has to do with selling online and how you deal with collecting tax when selling online. Collecting sales tax when you sell in-person is easy because you collect whatever sales tax for the location of your store, but that's not how it works online.
Intro: The different types of sales tax
Every state has different tax laws.
Some states have no sales tax, some states charge tax on item, some states charge tax on shipping fees, and some states charge tax on handling fees.
Some states charge tax based on how you display charges on your receipts.
Let's talk about the phrase "shipping & handling"
It's common for a business to use a handling fee to get extra money for a sale. Some ecommerce sites use handling fees as a pricing marketing tact. For example, you might find something for sale online that only cost $1, but then it has a Shipping & Handling fee of $40. In reality, the shipping might be only $10, and the handling fee of $30 is the real price of the item.
Handling fees can be used for anything.
Example: If you buy event tickets online you will often see a handling fee listed as a convenience fee for buying it online rather than in-person.
Example: The handling fee could be the cost of the packaging that you are adding to the sale.
Example: If you are using a drop shipping company, the handling fee could be the service charges that 3rd party drop shipper charges you.
People don't really like to pay "handling fees" so it's common to see "shipping & handling" as a single line item because it hides the truth behind if you are over charging for shipping or have an uncomfortably high handling fee.
Some states will charge tax on either shipping fee, or handling fees, or both. The tax is calculated according to how you display it on the invoice.
Example: Let's say you are required to charge tax on shipping but not handling. Let's say your shipping and handling charge is a total of $40, with the actual shipping charge being $10. If your invoice shows "shipping & handling" as a single line item then there's no way for the state to know what part of that $40 was the real shipping or the real handling, so you are required to charge tax on the whole thing.
Example: Let's say you have two line items on your invoice showing shipping as $10 and handling as $30. Since you are only required to charge tax on the shipping fee, then it's easy to calculate on the $10.
Most people think that tax is charge just to the sale of the item, but what we're explaining here shows that there's more to consider.
Sub-topic: Who do you charge tax to, and what amount of tax?
The first thing we should point out might be obvious, but we will say it anyway. The inventory system on your website must know the difference between the items and services that you sell, specifically, which ones are taxable and which ones are not. Sales tax would only be applied to a sale if an item is taxable and if the buyer falls within the criteria for collecting sales tax.
If your state has a sales tax then you have to collect sales tax from anyone who buys from your website when they are within your own state.
If someone is using your BOPIS or curbside service, you are collecting sales tax based on the location of your store. That's probably the easiest online sales tax to figure out.
Some states have a state sales tax and a local sales tax. Here in NJ we only have a state sales tax, but in CA, there is a different sales tax for every zip code. KS also has a different sales tax for every zip code.
If your jewelry business is located in CA, then you will need to charge a sales tax to anyone in CA that buys from you, but you have to charge them the tax according to their shipping address.
If you are in California, Kansas, or any other state that sets sales tax for every municipality, then your website must have the ability to calculate sales tax according to zip code. If your website does not have this feature built-in, then you might be able to pay for a 3rd party sales tax widget that can do this for you.
These 3rd party tax widgets have different setups.
The service called Avalara is well known for their sales tax service. If you are using Shopify, then you have to be using Shopify Pro if you want to use Avalara. Just a little warning, Shopify Pro is a $2,000 per month subscription. Avalara also has integrations with many other website platforms. Avalara's service is designed for active websites that have a few thousand orders per month, so if that's not you, then the cost of their service will be pretty high. My best guestimate of the cost of their service is $2,000 minimum every year.
TaxJar is another sales tax service. They are the direct competitor to Avalara. TaxJar charges $99 per month for sales tax automation for up to 200 website orders per month. That's $1,188 per year.
Both of these companies might seem expensive just for help with sales tax calculations, but they both provide the service to report your sales tax to the correct tax agency. This service could be well worth it if you only have a part time bookkeeper, or if your bookkeeper is already overworked, or if you are doing the bookkeeping yourself and you don't want to learn how to submit sales tax every month.
As a recap: Who do you charge tax to, and what amount of tax
1. If you are collecting sales tax online, you have to collect the tax based on the shipping destination of the buyer
2. Your website must have the ability to store the tax tables for every state where you are required to collect tax.
3. If your website does not have tax table ability built-in, then you will need to use a 3rd party service
Point of note: Before choosing to invest a lot of time and effort into your chosen website platform, you should investigate your sales tax responsibility and if the website platform you are using will handle it.
There's no reason for a jewelry store to be using Shopify Pro with their $2,000 per month subscription with another $2,000 per year for the Avalara tax table when GlitterPaw's most expensive monthly subscription is $625 and it already has the capacity for tax tables built-in.
Since tax fines can be a lot greater than the cost of your website maintenance, these 3rd party tax services charge a premium for what they do because they know they are providing you with peace of mind and protection against those fines.
Sub Topic: The need to collect sales tax from ecommerce sales
When ecommerce first appears there was a big advantage for anyone selling online vs physical resellers. In the early days of the internet you could find something in your local store, then go home to your computer and order it online without paying sales tax.
Of course this didn't always make sense, especially if the item was small and the cost of the sales tax was lower than the cost of the shipping you would pay. But for items like jewelry, there would be a big savings for someone to order a diamond ring online, say from BlueNile, and not pay sales tax like they would at the local jeweler.
This internet sales tax freedom was because of a court case that took place in 1992 called "Quill v. North Dakota" or just "Quill."
Supreme Court decision in Quill said that business "must have a physical presence in a state in order to require the collection of sales or use tax for purchases made by in-state customers."
This allowed retailers in other states to sell across state lines without collecting tax. It allowed shoppers to buy online across state lines and save the sales tax. This created a huge problem for local stores that did not jump into the ecommerce market because they lost local sales.
Another loser was all the states because the sellers didn't need to collect tax, which meant that the states were not getting the funding they need to support all aspects of government and social programs. When a state didn't have the money to repave an interstate highway, it could have been because they were no longer collecting millions in sales tax.
To combat this issue, everyone was supposed to claim all of their out of state purchases on their state tax return. But that was another problem because no one ever admits to buying goods online across state lines just to skip on paying the sales tax. Why would they declare it?
Now for an official term, because we just love to talk about buzz words on this show. The word is "nexus" which is sometimes called a "tax nexus" or a "physical nexus" or even a "nexus point."
With Quill, every ecommerce business would only have to collect tax in the states where they had a physical presence. That could be an office, a store, a warehouse, or a remote employee. It was pretty simple.
In 2016, South Dakota passed a law to challenge the basis for a nexus point.
Their law added two more reasons for what would be considered a nexus. The first reason is if you have more than $100,000 in sales to people who live in the state. The second is if you sell to more than 200 people in the state. If you did either one of these, then you would now have a "financial nexus point."
Wayfair took South Dakota to court over this new law and then the Supreme Court eventually had to rule over the case now know as "South Dakota v. Wayfair" or just "Wayfair" for short.
The Supreme Court ruled that states could write laws which would "requires a merchant to collect the tax only if it does a considerable amount of business in the State."
The idea of $100,000 in sales or 200 transactions was to help the small businesses from needing to collect tax from out of state sales.
Since Wayfair, many states have now passed similar economic nexus laws, which is why things are so messy with knowing where and when you have to collect tax.
Many states have stipulated different levels of sales, like $100,000, or $200,000 or $50,000. Some have stipulated 200 transactions, some have stipulated higher or lower than 200 transactions.
Sub Topic: How do you know where you are required to charge tax?
In addition to the different nexus laws, there are some states that now have laws that say you have to collect tax if you drop ship from one of your suppliers.
Example: This is just an example to illustrate the point, and you would have to see how it applies to you. You can save you and your customers some money on shipping when your supplier is willing to ship directly from them to your customer. There's always an extra cost when your supplier has to ship to you and then you ship it back out to the buyer.
New Mexico has a nexus law that refers to "other agents" as a company that will drop ship for you. So if you have a jewelry manufacturer in New Mexico that will drop ship for you, this might trigger the nexus law which forces you to collect sales tax when selling to buyers in that state.
The bottom line is that you are responsible for figuring out when you need to collect the sales tax. You really do need the help of a tax professional to figure it out. Once you do figure it out you then need to examine your website platform to make sure it handles the tax tables correctly.
Sub Topic: Submitting tax
We have no real words of wisdom for how to submit the tax you collect. That's something that you need to talk you’re your accountant about, and your bookkeeper must handle it every month for you.
The 3rd party sales tax services we mentioned will file the needed paperwork every month for you. They will also let you know when your sales volume gets past the threshold for every state that has an economic nexus so you know when you need to start collecting tax and when to start filing in those new states.
As a small business selling online, most jewelers probably won't need to collect sales tax for any state other than their own. Jewelers who live in states that have different municipal tax rates must account for that on their website.
We know that most jewelers will never hit the "financial nexus" level for any state. Even if you are selling $5,000 rings online, you'd still have to sell at least 20 of them to the same state before you get to $100,000.
According to the diamond industry research firm, Edahn Golan, the average American household spent $647 on jewelry in 2018. That number is probably different now in the post-pandemic economy, but if we use that number as what your average online sale might be, then you would need to sell to more than 154 people in one state before you get to the $100,000 nexus level.
It would be great to see small jewelry businesses have this many sales into a single state, but we are realistic and know that you can only get to that level if you have invested a lot of time and money into your online marketing.
Therefore, the cost of those 3rd party tax services seem to be unnecessary for most jewelers. In fact, the cost of them can easily be more expensive than the monthly subscription you are paying for your website platform.
As a small business, it makes more sense to use a website platform that has built-in tax table functionality for all the different scenarios. This would be easier than to be forced into paying for those extra services because your chosen platform was inherently inadequate.
As a mini commercial for our platform, this functionality is just another example of something we built into GlitterPaw so our users would not have to pay for those extra services when they are probably never going to need them.
Remember, everything we've told you about today can't be considered official financial advice or tax advice. We have a better than average understanding of this stuff because we need to know it in order to make sure that our GlitterPaw platform works correctly for however you need to collect tax. We've also split out the shipping and handling on different line items on the invoices that GlitterPaw creates so you won't be required to collect tax on those items if that applies to your state.