State & Local Tax Blog

Holiday Sales Tax Liability: 4 Things Ecommerce Sellers Need to Know

This Holiday season is on track to set new records for online sales. But this also means serious compliance issues for thousands of sellers. In this post, we break down the implications you need to be aware of and how to prepare.

In 2020, ecommerce sellers experienced incredible growth in online sales. And with Black Friday online sales coming in at $9 billion – up 22% year over year – it’s clear this holiday season will be a record one for ecommerce.

But while businesses are bracing to meet demand, there’s an even bigger, more threatening challenge on the horizon. This surge in online sales will push thousands of sellers over economic nexus thresholds, creating new liability to collect and remit state sales tax.

Here’s what you need to know to stay prepared.

Prioritize Compliance

During such a busy season, it’s easy to focus on pressing areas of your business, like keeping up with inventory and distribution. But if you neglect compliance, the profits you make could disappear.

A surge in sales can quickly create a huge liability of uncollected taxes. And if a state audits you, they’ll charge you for unpaid taxes plus penalties and interest. With the average audit costing taxpayers $114,147, it’s easy to see how your margins for the season could disappear overnight.

That’s why getting and staying compliant is so important. It’s a long-term investment to protect your business and its profitability.

Understand Your Nexus

Before you can predict how the holiday season will impact your liability, you first need to understand the nexus you have now.

Conduct a thorough review of all your online sales. What are the total sales you’ve made in each state?

Next, compare the sales in each state to that state’s economic threshold. If you’ve exceeded this threshold, you may have a sales tax responsibility in that state. If you’re below – but still close to – the threshold, use your sales projections to predict whether you’ll exceed the threshold.

With these projections in mind, you can start preparing for the liability your seasonal sales will create.

You can also use certain exemptions to decrease this number. Here’s how.

Focus on Non-Marketplace Sales

On every taxable transaction, someone is liable for collecting and remitting sales tax. On most transactions, this responsibility falls on the seller. But in states with marketplace facilitator laws, facilitators like Amazon and Walmart are responsible for collecting sales tax for every transaction.

The good news for ecommerce sellers is that you don’t have to worry about marketplace sales creating tax liability. Facilitator laws allow you to shift the liability for these transactions to facilitators.

So, even if your Amazon or Walmart sales explode this year, it will have no impact on your liability in the vast majority of states. This narrows your focus to sales made on your website, making compliance much more manageable.

Look for Exemptions

After conducting a nexus review, you’ll need to see if the products and services are eligible for tax exemptions. This could allow you to mitigate your sales tax responsibility and keep yourself under thresholds that would create a responsibility.

Food, supplements and apparel are the most common exemptions available, but there are a number of other options out there. For example, in some states you can claim exemptions for sales to schools, some government entities, and non-profits.

Conclusion

End of year sales present great opportunities for ecommerce sellers, but there are still compliance issues to be aware of. When you’re evaluating your liability, always keep in mind what you’re selling, who you’re selling it to and what platform you’re selling on. These simple steps can be the difference between having a 6-figure sales tax liability or none at all.

Looking to get your tax compliance in order for the new year? We’re here to help. Fill out our short What’s Next questionnaire to get in touch for a free 45-minute consultation.

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