Are You Collecting Sales Tax for Your Online Sales?

Elizabeth Quintana
March 13, 2017

This blog was last updated on June 26, 2021

There are still many who view the convenience of online shopping as the real lure of Internet shopping rather than the presence or absence of sales tax. While many people shop online for convenience, others turn to e-commerce to avoid paying sales tax. According to the Supreme Court case Quill v. North Dakota, retailers are only required to collect and remit sales tax when they have a physical presence — called a nexus — in that state, such as a storefront or distribution center. This is why many online retailers are able to sell their products tax-free to customers in most jurisdictions.

Customers Spending Less to Account for Sales Tax

A Washington Post report published online by the Chicago Tribune notes one retail giant saw a reduction in product sales where shoppers were spending less on merchandise to account for the sales tax being added to their purchase, even though they continued to spend the same amount of money overall. For online retailers, this report highlights the critical importance of tax calculation accuracy, as over-charging tax may negatively impact the bottom line. Revenues at brick-and-mortar retailers have gone down significantly due to online shopping. Affected retailers have asserted that when online retailers are required to collect sales tax it levels the playing field and helps brick-and-mortar stores better compete in today’s market. Online retailers are facing an ever-changing compliance landscape and a potential future state where they may be required to charge tax everywhere.

New Laws Add Challenging Compliance Requirements

States are now testing the limits of the Quill ruling by passing new laws, such as the one passed in Colorado requiring remote sellers to notify buyers in those states of their obligation to pay use tax, and then to report those customer purchases to a state reporting agency. Such laws add challenging compliance requirements and leave vendors with the question of whether it might be easier to simply collect tax. The Colorado law has been ruled constitutional in DMA v. Brohl. States — South Dakota, for one — have enacted new laws requiring out-of-state online retailers to collect sales tax after they have met a certain sales threshold for transactions taking place within their state — deeming this threshold an “economic nexus.” Laws like these will continue to push the limits of Quill as more states attempt to collect sales tax on internet sales from out-of-state sellers.

Iowa: Charging Sales Tax Despite No Legal Requirement

Iowa is one example of a state that loses millions in sales tax revenue from out-of-state online retailers selling to its residents. The Department of Revenue estimates that Iowa loses between $18 million and $24 million in sales tax collections to online retailers with no in-state presence. One online retail giant selling to Iowans made the decision to voluntarily pay sales tax in Iowa and other states even though it had no physical presence there. The retail giant announced late December it would start collecting Iowa’s 6 percent sales tax at the beginning of 2017 on all internet sales in the state; however, it’s unclear what prompted the change.

The Real Winner

Most view the convenience of online shopping as the real lure of e-commerce, rather than the presence or absence of sales tax. In a world where brick-and-mortar retailers apply the same sales tax rules as their online brethren, the real winner is the economic principle of neutrality, meaning that convenience and personal preferences (and not tax considerations) dictates how people choose to shop.

Conclusion: Sovos Shoulders the Burden of Compliance

Sovos will be monitoring legislative updates as more and more states may be motivated to impose compliance requirements on internet sellers. Facing growing calculation and compliance requirements for online transactions, retailers will continue to find reliable, up-to-date, integrated sales tax calculations in their Sovos Compliance Systems.

Take Action

Learn more about how Sovos Enterprise Sales Tax Sovos can help your company stay in compliance with sales tax requirements for your online sales.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Elizabeth Quintana

Share this post

North America Sales & Use Tax
February 6, 2025
The Tariff and Sales Tax Mishmash – Untying the Mess

This blog was last updated on February 6, 2025 Talk of tariffs dominates the current news cycle with some commentators suggesting that tariffs will spell disaster for our economy while others say the exact opposite. We’ve seen the stock market sometimes fluctuate as tariffs are announced but later suspended, leaving us to wonder whether an […]

retailer dtc wine shipping
North America ShipCompliant
February 6, 2025
Retailer DtC Wine Shipping: The Time Has Come

This blog was last updated on February 6, 2025 By Tom Wark, Executive Director, National Association of Wine Retailers We are often reminded by the media and those in the wine industry—as well as by wine enthusiasts—that the three-tier system of alcohol distribution in most states hinders consumer access to the expansive number of wines […]

Montana 1099-DA
North America Tax Information Reporting
February 5, 2025
State Filing Alert: Montana’s New 1099-DA Requirements for Crypto Brokers

This blog was last updated on February 5, 2025 Reporting digital asset transactions on Form 1099-DA just got a little more complicated. For 2025 transactions, crypto brokers that file Form 1099-DA with the IRS will be required to file the 1099-DA with the State of Montana. This makes Montana the first state to introduce a […]

North America ShipCompliant
January 23, 2025
DtC Wine Shipping in 2024: A Year-in-Review

This blog was last updated on January 28, 2025 The direct-to-consumer (DtC) wine shipping channel faced a storm of challenges in 2024, navigating some of the toughest market conditions in over a decade. As inflation tightened wallets and consumer behaviors shifted, the industry recorded its steepest declines in shipment volume and value since the inception […]

Form 1099-DA Crypto Transactions
North America Tax Information Reporting
January 21, 2025
What is Form 1099-DA and How Does it Impact Crypto Transactions?

This blog was last updated on January 24, 2025 The IRS has released Form 1099-DA and its accompanying instructions for filing for TY 2025. Form 1099-DA is the newest IRS information return, designed for reporting digital asset proceeds from broker transactions and is required to be filed by brokers managing digital assets such as NFTs […]