Selling a t-shirt in Massachusetts isn’t so hard—the state’s sales tax is a smooth 6.25% statewide. But try to sell that same item in Alabama, for example, and a retailer will need to figure out not only the state sales tax rate, but the county, district and potentially sub-district rates that apply in the exact location of the sale, says Charles Maniace, director of tax research in the sales, use and value-added tax division at ADP, which sells software to calculate sales tax for e-retailers and help them file returns.
The variations in which items are taxed and at which rates are more complex for an online retailer than for any given physical store. A store in Mobile, AL, for example, will know whether it has to charge tax on a T-shirt and the rate. But an online T-shirt retailer has to be able to instantly calculate any applicable taxes, and know the rules for Mobile, Boston and all the 10,000 taxing jurisdictions in the United States
Software and services like ADP’s help e-retailers selling all over the country not only make sure they are taxing consumers at the correct rates, but save time and resources spent tracking rule changes, adjusting checkout prices, accounting and filing returns.
For example, Logos Bible Software, which sells bible study software in the United States and Canada, estimates it has saved the work of at least one full-time employee filing monthly tax reports since starting to use software from vendor Avalara in 2007, says Andy Skipton, Logos’ chief financial officer. The retailer pays about 20 to 30 cents per transaction for Avalara’s Internet-hosted software to determine the sales tax rate for each online shopper, based on her street address, he says.
Collecting the wrong sales tax previously cost the company significant amounts of money, Skipton says. “And sometimes we were collecting tax on things we shouldn’t have been, so it was costly for our customers, too.”
Now Logos sells 70-80% of its software online, and most of it via download, as a digital good, he says. But many states treat digital goods differently than physical goods. For example, Logos’ customers in California pay 10% sales tax if retailer ships a disc containing the software to their homes, but they pay no sales tax if they download it, Skipton says.
“It’s becoming crazily more complicated,” he says. “Each state has absolutely their own way of doing it and no state does it the same.”
States aren’t required to follow one another in how they tax sales and services, Maniace of ADP says, and they change rates frequently and independently of one another. “That’s pretty much why clients use us,” he says.
ADP updates its software monthly with the new rules regarding which products are taxed in each jurisdiction and tax rate updates that will become effective the next month, he says. His team of 41 attorneys, accountants and other staff with tax and legal credentials monitor legislative, regulatory, policy and revenue changes in jurisdictions across the country every day, he says. Most customers pay a monthly fee for the software, which they can install on premise or access through the cloud, he says, though some pay per transaction.
Under federal law, states cannot require retailers to collect sales tax unless they have a physical presence, such as stores or distribution centers, in a customer’s state. But that may change. Twenty-four states have agreed to follow a set of standardized state sales tax guidelines, called the Streamlined Sales and Use Tax Agreement, or SST. If the Marketplace Fairness Act, a bipartisan bill introduced in the U.S. Senate last November, is passed, those states will have the authority to require web and catalog retailers to collect sales tax on in-state orders and remit the collected revenue to them. A separate bill, the Marketplace Equity Act, is designed to give states the authority to mandate sales tax collection even if they don’t participate in the SST.
Maniac says the legislation would substantially change the obligations of e-commerce businesses by imposing sales tax collection responsibility on many more online merchants.
Additionally, he says the complexity of sales tax for online retailers is increasingly based on two other trends: More states are auditing sales tax records than in the past, he says, which increases retailers’ of accounting responsibilities. Many states are also pushing to either amend or adjust their existing laws to tax more products, particularly from e-commerce, in order to balance their own budgets, he says.