One of every five beauty purchases online is made via the Amazon marketplace, according to a new report.
With mandated sales tax collection becoming more likely, online retailers should take a hard look now at their tax strategies. Want amnesty for back taxes? Proceed carefully.
With Congress increasingly likely to pass national online sales tax legislation, merchants may want to seek amnesty deals with states for uncollected back taxes. But to minimize what they may have to pay, it’s best to see what kind of deal a state offers before registering to collect taxes, tax experts say.
In every Congress for the past dozen years, legislative proposals have sought to back a system that would allow states to mandate collection of sales tax by online retailers. But though these bills have never won enough support to become law, pending legislation in the current Congress appears to have a better chance of winning approval, tax experts Stephen Kranz, a partner with law firm Sutherland Asbill & Brennan, and Maureen Riehl, vice president, government affairs, Council on State Taxation, said at the Internet Retailer 2012 Conference & Exhibition in a session titled “The new urgency for developing a state sales tax strategy.”
Thanks to support from retailers like Amazon.com Inc. and pressure among states to raise tax revenue without imposing new taxes, a federal law that would allow states to mandate sales tax collection by most online retailers is becoming more likely. As a result, retailers should figure out now how much sales tax collection will affect their profit margins, factoring in the cost of collecting the tax and the effect of displaying higher prices to customers.
Merchants should also consider whether they may already be in trouble in some states, such as by being liable for tax collection under what can be confusing rules regarding drop-shipping, Kranz said. “Don’t hide,” he warned. “You’d just be building up penalties and taxes.”
One approach some merchants have followed is to seek an amnesty deal in states where they believe they’re liable for uncollected back taxes. Under such agreements, a retailer will usually agree to begin collecting sales tax before a law makes it mandatory; in exchange, the merchant is typically relieved of having to pay the state for past uncollected tax and penalties.
But such merchants shouldn’t rush to register to collect tax before completing an amnesty agreement, Kranz said. It’s best to work out the best terms while the state is still hungry for a deal, he added.