There are more than 10,000 local taxing jurisdictions in the United States. Not to mention, the tax rules in each of these jurisdictions can be different (ugh!). So bottom-line, the tax rules surrounding e-commerce are too complex to cover within the context of a blog. However, we can make you aware of some of the issues surrounding sales and use tax in e-commerce.
Nexus: Brick + Mortar to E-commerce
Let’s be honest, the tax system is old. Back in the day, most sales took place under the brick and mortar business model; customers came to you to purchase tangible goods (we’re talking about goods you could physically touch). Every sale was taxable and only one local (county, city) jurisdiction applied; unless an exemption was applicable.
When e-commerce happened there were concepts like virtual, intangible, etc. that weren’t defined by the tax rules. In addition, determining nexus became more complex. As a result, we began to see a marketplace in which not all sales were taxable.
So, what changed?
The customer’s shopping habits changed. Now, customers can (and a lot of them do) shop online. Not all of the online sales transactions are even taxable. It it all depends on nexus and the rules aren’t even the same everywhere.
Speaking of selling online… if you use a fulfillment agency (like Amazon), ownership is the key to determining nexus. If you retain the ownership of your goods while they are stored in the fulfillment warehouse, you have created nexus in the taxing jurisdiction in which the warehouse is located. If the fulfillment agency purchases the goods from you, the transaction does not create nexus in the taxing jurisdiction in which the warehouse is located.
How goods are delivered changed. Now, goods have become intangible (those are goods you can’t physically touch but still have value) such as cloud-based software, mobile applications and online paid content (we’re talking newspapers and magazines delivered online).
Thinking back a few years, customers bought software off the shelf at the store or had their newspapers or magazines delivered to their homes. These were both tangible goods (and the tax rules knew how to handle that). Now, customers download software from the cloud or view their newspapers or magazines online. So depending on where you have nexus, those rules apply (and yep, they aren’t the same everywhere).
Where our employees could work from changed. Now, having virtual employees is easier than ever. But this complicates your responsibility to collect sales and use taxes because those virtual employees create nexus.
Moral of the Story…
There are plenty of other considerations when it comes to e-commerce because (in case you hadn’t guessed), the sales and use tax rules are far from straightforward (in many cases). That’s why we recommend having a sales and use tax expert on your side (and there are some online solutions that can help too). Don’t forget, we have experts who are ready to help your business comply.