By Ben Kinsey, CPA
 |
| Image courtesy of flickr |
Ben Franklin said it best when he coined the phrase, "In this world nothing can said to be certain, except death and taxes." But as all business owners know, while death calls but once, there are many different kinds of taxes they are expected to pay at different times of the year. While income taxes are paid but once a year, business owners are required to frequently pay sales tax on many of the things they sell, as well as a number of things
they buy. The second kind of sales tax
is referred to as Use Tax.
Use tax in Jacksonville
is normally 6% to the state and 1% to Duval county. However, this year they’ve dropped the use
tax for commercial rental properties to 5.8% plus a ½ a percent or 1% county
tax depending on the county the property is located. In many cases to get the
taxation right, commercial property owners may have to redo their lease agreements.
While taking advantage of a .2% lower tax rate isn’t going to make them rich,
it’s still the property owner’s responsibility to charge the correct amount of
tax.
Internet Sales Tax
The biggest difference
to any business owner who does business online is that they are soon going to
be required to collect and remit sales tax to any state in which they sell
taxable goods. It used to be that they only
had to collect and remit sales tax to any state in which they had a physical
location. Until recently, if you were a
Florida corporation with an office in Florida, you only had to collect and
remit Florida Sales tax. If you had a
second office, say in Georgia, you were also required to collect and remit
Georgia sales tax. Regardless of where
else you sold your goods, you weren’t required to collect and remit sales tax
to any other state in the Union.
 |
| Image courtesy of Pixabay |
New legislation has
recently been enacted that states if your website deposits cookies, this will
be considered a physical presence in that state, requiring you to collect and
remit sales tax for any of the states that have legislated this change. Now I know what you’re thinking. How can a cookie be considered a physical
presence, and won’t it only be a short time before a corporation challenges
this ruling in court? To that I have
good new and I have bad news. The good
news is that Wayfair Inc. has already taken the matter to the Supreme Court. The bad news is the court overturned the
ruling set down in 1992 which required a retailer to have a physical presence
in a state in order to collect sales tax. Wayfair did not have a physical office in the
state of South Dakota, but the Supremes ruled 5 to 4 that the test was met through
the use of cookies.
An article in the
Journal of Accountancy sums up the situation below:
“In 2016,
South Dakota enacted a law, S.B. 106, requiring out-of-state sellers that
annually delivered more than $100,000 of goods or services into the state or
engaged in 200 or more separate transactions for the delivery of goods or
services into the state to collect and remit sales taxes to South Dakota.
Because South Dakota’s Legislature was aware that its new law would be
unconstitutional unless Quill was
overturned, it included a provision for expeditious judicial review if the law
was challenged. Therefore, South Dakota filed a declaratory judgment action in
state court against Wayfair Inc., Overstock.com, and Newegg Inc., all large
internet merchants that have no employees or real estate in South Dakota and do
not collect sales tax for the state. The state also sought an injunction
requiring these companies to register for licenses to collect and remit sales
taxes as required under the act. The companies moved for summary judgment in
state court, arguing that the act is unconstitutional. After the law was
declared unconstitutional by South Dakota courts, the Supreme Court
granted certiorari.”
As a result of this ruling, thirty additional states have jumped
on the bandwagon by requiring out of state companies to collect and remit sales
tax for internet sales. This means not
only major online etailers are going to be subject to this law, so is any
internet vendor that uses a platform that deposits cookies. If you run an eBay store, you will be
required to collect sales tax in states other than the one in which your
business operates. Do you vend products
on Amazon? The same law applies. In fact, if you use most any ecommerce engine
on the market today to transact sales, you will be on the hook to collect and
remit sales tax in 31 states. (This
number is expected to rise as the rest of the states in the Union quickly
follow suit.)
 |
| Image courtesy of Pixabay |
The reason for this sea change has to do with the losses in
taxable income that online commerce has wrought. In 1995, online sales amounted to only $16
million. It was barely a blip on the
radar. But by 2016, that number had jumped to more than $3 trillion. Since
2016, online sales during the Christmas holidays have actually exceeded those
of brick and mortar retailers. And those
numbers are only expected to increase.
Since out of state etailers were not required to pay sales tax to states
other than the ones they had an office in, this left state legislatures
scrambling to find a way to fill their coffers.
South Dakota vs. Wayfair Inc. was the first successful shot across the
bows of the online retail industry.
Here’s the way the Supreme Court interpreted the law:
“In deciding to overrule Quill and Bellas
Hess, the Supreme Court found that the rule banning sales tax collection
when businesses lack “physical presence” in a state was an incorrect
interpretation of the Commerce Clause. The Court criticized the Quill decision on several
grounds. First, the physical presence rule is not a necessary interpretation of
the “closely related” nexus requirement from Complete Auto Transit v. Brady, 430 U.S. 274 (1977). Second, the Court found
that Quill creates,
rather than resolves market distortions, calling it a “judicially created tax
shelter for businesses that decide to limit their physical presence and still
sell their goods and services” to a state’s residents.”
While the supposed
intent of the court was to level the playing field by providing states the
opportunity of avoiding being bled dry by an ever-expanding online retail
industry, the results may prove to be devastating to small mom and pop
etailers. While collecting sales tax in
a number of states is not that high of a hurdle for etailers, remitting those
same taxes on a monthly basis could wind up being the straw that breaks the
camels back. This is no easy task when
you consider what to takes to meet sales tax requirements in the state of
Florida, with all it’s many counties.
Multiply this task by 30-50 states and it’s probable that many small
etailers will be forced to close up shop, since the added cost needed to
satisfy each and every state they do business in could prove to be too much to
take.
What it comes down to
is only time will tell whether the online sales tax shuffle will level the
playing field or simply be a game ender for many small online retailers.
Ben Kinsey, CPA of Small Business Group works with owners of closely held corporations in the Northeast Florida region. If you work in the North Florida area we offer a FREE initial Consultation at our office, please contact Small Business Group if you would like to know more about strategies for your business.
(904) 731-2221
http://www.smallbg.com/appointment.htm
Sales taxes are a big deal to any reatier. Your information really help to determine if selling products online makes sense.
ReplyDelete