After two years of social distancing and other public health measures that considerably limited brick-and-mortar retail operations, many American shoppers are happily returning to their favorite physical stores. While this is a welcoming development, retail industry analysts do not foresee a strong shift from online shopping to brick-and-mortar; if anything, they believe that the e-commerce explosion experienced from 2020 to 2022 will continue to unfold, albeit at a more gradual pace.

Online Sales Taxes

If we look at the evolution of e-commerce taxation since the 1990s, we can see that the Wild West scenario of online retail giants refusing to pay online sales taxes is clearly behind us. Legislators in all states have listened to the assessments of revenue collection officials; over the last two decades, they have passed laws and introduced rule changes to ensure that they can collect taxes from e-commerce transactions regardless of where they originate. This creates a new dimension in tax compliance that you should be paying close attention to.

What Happens When You Ring Up E-Commerce Sales

From a technology point of view, it is easy to think of an online shopping cart module as being where the point-of-sale (POS) system is located. In terms of e-commerce tax compliance, however, this is not the case. In 2022, the location of the e-commerce POS is determined by the shipping address indicated by shoppers. As an e-commerce business operator, it is up to you to inform shoppers about sales taxes, calculate the percentage, collect the tax, and remit it to the respective revenue collection agency.

Since 2018, the door has been wide open for states to collect taxes on online retail purchases made by e-commerce entities located beyond their jurisdictions; this has been facilitated by the South Dakota v. Wayfair decision made by the United States Supreme Court. The shopper does not even have to reside in the state in order for the transaction to be deemed taxable. Let’s say a teacher from Minnesota goes to visit Mount Rushmore, and she decides to have some spa toiletries delivered to her hotel in Rapid City. In this example, the e-commerce provider is expected to collect 4.5% sales tax because the shipping address is located within South Dakota.

E-Commerce Tax Collection Trends

The aforementioned Wayfair ruling has already moved some state revenue officials to evaluate their e-commerce tax collection rules. The current rule of thumb is based on physical presence, but it will soon evolve into what is called a nexus. If your e-commerce operation has an office, store, warehouse, or even an agreement with a fulfillment service such as the ones provided by Amazon, you must collect sales tax.

Barring a physical presence, some states have been changing their interpretations of business nexus. On one hand, you have states that require you to register as a foreign business entity, which is something that a registered agent can handle for you; it is easy to think of this as a valid nexus, but not all states operate this way. Other taxation jurisdictions may declare that a nexus has been established at the moment the first e-commerce transaction is completed. Then we have states such as Wisconsin, which does not require collection and remittance unless the number of online sales shipped to addresses in that state surpass the $10,000 annual threshold.

It is not difficult to see a near future whereby the nexus relationship is loosely
established; after all, this is too good of an opportunity for state taxation
agencies to ignore. Multistate online sales taxation will become a standard
business process for many e-commerce operators, and this means compliance
with the following:

  • Nexus rules
  • Real-time sales tax calculations
  • Sales tax reporting
  • Collection
  • Filing and reporting
  • Remittance

If you see these aspects of e-commerce taxation as being part of a complex
business process, you are not alone. We are seeing many clients inquiring about
what they should be doing as their marketing efforts pay off and their out-of-
state sales begin to take off. At WKB Accounting, we offer services that range
from bookkeeping to sales tax reporting and from filing to submitting funds. In
some cases, you may be able to integrate our digital tax platforms with your
existing e-commerce systems in order to make things more efficient. Please
contact our office today to discuss your options in this regard.