E-Fairness Solutions Make Online Sales Tax Quick and Easy

March 18, 2014

FYI: For those of you that didn’t already see it, the following Op-Ed piece by our CEO ran in Politico last week.

Online retailers are a tech-savvy bunch. They seem to know what we want, when we want it—and how to get it to us as quickly as possible. But a few of the same companies that have figured out how to target our shopping habits and ship products of all shapes and sizes around the country are now claiming that collecting sales tax is too hard.

These critics of e-fairness legislation have suggested that private-sector software already widely available for collecting sales tax is incomplete, complicated, and expensive. As an e-commerce entrepreneur for almost two decades, and as cofounder and CEO of TaxCloud, one of several online sales tax management services, I’d like to offer the truth about online sales tax.

The same technologies that enable smartphones also make sales tax calculation quick and easy: At TaxCloud, our software works directly with e-commerce platforms to calculate sales tax during each customer’s checkout. Everything needed to figure out the correct tax rate is already present during an online sale: the purchaser’s address, the sales price, and the type of item being purchased. That information is used to calculate the appropriate sales tax in a fraction of a second, just like shipping charges. Don’t be fooled—calculating sales tax is not laborious or burdensome. It’s really quite simple.

Collecting sales tax is not very expensive, either: Software and services that manage sales tax collection aren’t hard to find or expensive; in fact, in some states the service is free. Opponents of an e-fairness solution have made numerous misleading statements about the costs of software, presumably to preserve the preferential treatment they currently enjoy in the tax code. For instance, while publicly railing against the expense associated with online sales tax, eBay actually features a sales tax utility on its own website that costs $15 per month. And many third-party online storefronts or marketplaces can handle sales tax collection for their merchants for a very small fee. The cost of software is simply not an impediment for small online sellers.

Set it and forget it—why software makes it easy: It’s true that any sales tax system will need to know the type of item being purchased in order to determine if it’s tax-exempt. It’s important to remember that bricks-and-mortar sellers have always been required to assign tax classifications to their wares—this is not a new concept or obligation. And here again, the rhetoric does not match reality.

First, most small online stores tend to be specialists—they’re more likely to be selling one class of products than a wide range—and if that’s the case, all a seller needs to do is set their entire store to one tax category. Click—done. Second, even if a small online retailer sells many kinds of items, they would only need to assign categories to tax-exempt items, a small subset of most stores’ inventories. Click, click—done. E-commerce platforms are designed to assign large groups of items to tax categories, so no online seller will spend their time worrying about whether an item is tax-exempt or not. The bottom line is that once these categories are set, online retailers can focus on serving their customers—not on tax collection.

Tax returns aren’t filed by horse and buggy anymore. Despite the oft-repeated claim that compiling and filing sales tax returns with multiple states will create huge burdens and audit risks, the fact is that all of the existing sales tax management services can take this task off an online retailer’s hands entirely. Agreements with individual states let these services handle filing returns and remitting tax proceeds, without any effort from the retailer themselves. Most of these services also store all returns associated with your account, so accessing past records is a breeze.

Twenty years ago, opponents of remote or online sales tax collection were correct—collecting sales tax was rather laborious and time-consuming. But the same burst in technology that now allows consumers to shop anywhere, anytime, and have whatever they want delivered to their door in under twenty-four hours, also makes charging sales tax remarkably simple. For online stores, collecting sales tax is easier than configuring shipping charges. “Doom and gloom” predictions about the technology are misplaced—and any suggestion that sales tax management systems don’t already exist is simply wrong.

If Congress believes that online retailers should be exempt from the same laws and tax policies that every other business complies with, that is of course their right. But they shouldn’t make that determination based on the misguided and misleading rhetoric spun by those who stand to benefit from special treatment. And if Congress chooses to end the current disparity and treat all retailers equally, rest assured that the free market has already developed the tools and software necessary for both online sellers and brick-and-mortar retailers to thrive and grow in the decades ahead.


How sales tax management services handle audits

July 8, 2013

Congress is currently considering legislation to allow states to require online retailers to collect sales taxes. The bill that was passed by the Senate in May, the Marketplace Fairness Act, has raised concerns about how it could affect the way businesses are audited.

At TaxCloud, we handle not only sales tax calculation and collection but also filing and audits for many of our merchants. While we don’t know exactly what future legislation may say about audits, here’s what our experience dealing with audits has been like.

First, a little background: The 24 states that have designated us a Certified Service Provider (CSP) have agreed not to hold our merchants liable for any tax calculation errors, and in the event of an audit, these states deal first and primarily with us, not the business itself. So how does this work?

When one of our merchants is audited, the state begins by contacting us. We act as the intermediary between the state and the merchant. The state lets us know that it will be reviewing the merchant’s transactions and conducting an audit beginning on a particular date, and we in turn notify the seller.

The merchant doesn’t need to provide any additional information at this point, as long as we have complete transaction data. If there is transaction data that we don’t have, the merchant needs to supply it.

During the audit, the state sends any information or document requests directly to us. Occasionally we may need the seller’s help to respond. For instance, if an item was classified as tax-exempt but it’s not clear in the transaction records exactly what the item is, we’d ask the seller to provide a description of the item. The state contacts the merchant directly only if there is evidence of fraud.

If future legislation follows this pattern for audits, it’s good news for businesses: It means that states will go to sales tax management services for data that businesses have traditionally had to supply, so businesses won’t be faced with hosting an audit.


Editorials support Marketplace Fairness Act

April 30, 2013

The Marketplace Fairness Act has been all over the news in the last two weeks as it’s been debated on the Senate floor. The Senate is recessed for this week, but a vote on the bill is scheduled for Monday, May 6.

Most editorials on the topic have largely been in favor of online sales tax. Among the largest news outlets supporting it are:

(One notable exception to the general trend of support was the Wall Street Journal, whose April 17 editorial “The Internet sales tax rush” was effectively countered by the National Governors Association in a letter published on April 25.)

There have also been a lot of positive editorials from smaller local outlets, including:

If you’re interested in reading more, you’ll find a compilation of news articles on the Marketplace Fairness Act on marketplacefairness.org/news.


eBay and the small business exception

April 22, 2013

In an email Sunday to 40 million eBay users, eBay CEO John Donahoe urged them to oppose the Marketplace Fairness Act unless the small business exception, which exempts online retailers with less than $1 million in out-of-state sales from collecting sales tax, is raised to $10 million or 50 employees.

We’re all for making sure small online businesses don’t have to spend time or money dealing with sales tax (that’s why we created TaxCloud in the first place), but here are three reasons that raising the exemption threshold doesn’t make sense:

1. At the $1 million threshold, most online retailers are already exempt. Nationwide, fewer than 1000 online retailers* have more than $1 million in total sales. (If we consider only out-of-state sales, that figure is even lower.)

2. Collecting sales tax doesn’t require the resources of a large company. The Marketplace Fairness Act requires states to provide free sales tax software and services for online retailers, so online businesses wouldn’t need to spend anything to comply with the bill.

3. Most small online retailers already use e-commerce platforms, which can easily provide add-ons that handle sales tax, just as they provide for shipping—making sales tax collection easy for all their retailers at once. And we’d lay odds that once states can require online businesses to collect sales tax, that’s exactly what they’ll do.

By exempting online retailers with less than $1 million in out-of-state sales, the small business exception already does what it was designed to do: ensure that small online businesses are not burdened by online sales tax collection. But raising the exemption threshold to $10 million or 50 employees would be a mistake.

*According to Internet Retailer‘s Second 500 Guide, only the top 980 online retailers in the nation had over $1 million in sales in 2011.


Why online sales tax does NOT let states “tax beyond their borders”

April 22, 2013

One of the more common arguments we hear against online sales tax is that it would let states “tax beyond their borders.”

First, that statement is factually untrue—states can only tax state residents, and that wouldn’t change with online sales tax.

But online sales tax does mean that states could require out-of-state businesses to collect (not pay!) tax on sales to state residents. Some argue that this would be an expansion of state authority.

In fact, with online sales tax, states are simply taxing economic activity within the state—something they have always had the right to do.

And it’s worth noting that outside of sales tax, businesses that sell into a state are required to follow that states’ laws. For example, let’s say you live in California and purchase a camp stove from a company based in Minnesota. The camp stove is defective and causes a fire. The Minnesota company could be held liable for violating California product safety laws.

So why can’t states require out-of-state retailers to collect sales tax right now? Why do they need federal legislation, such as the Marketplace Fairness Act, to grant them that ability?

The answer goes back to a Supreme Court case, Quill v. North Dakota (1992). In that case, the court said that while it’s fine to require an out-of-state business that sells into the state to follow state law, it would be too difficult for out-of-state sellers to comply with state sales tax laws. In other words, Quill says that sales tax is an exception to the general rule that if you sell into a state, you have to abide by the state’s laws.

But with today’s technology, collecting sales tax is no longer difficult—so the reason behind the Quill decision no longer applies. And that means that there’s no reason for sales tax to be an exception to the rule.


Why the number of sales tax jurisdictions doesn’t matter

April 1, 2013

Illustration by Cory Thoman - http://clipartof.com/1087428

So what does all that mean?

First, let’s be clear: It would never mean a sales tax return or an audit for each jurisdiction. The Marketplace Fairness Act says that there has to be just one central authority in each state that handles sales tax returns and audits. So no matter how many tax jurisdictions are in a state, there’s just one return to file, and if a retailer is audited, there’s just one audit from the state. And retailers who use state-certified sales tax management services don’t need to worry about audits in general—but more on that in a moment.

So what about sales tax rates, which can vary by jurisdiction?

The good news there is that the Marketplace Fairness Act requires states to provide sales tax management software or services (such as TaxCloud) for free. These programs check and update rates and product definitions for every tax jurisdiction, and it all happens behind the scenes, so sellers don’t need to worry it.

In the end, for online sellers, collecting sales tax is much like handling shipping. There’s a program or service to set up with the online store, and then the program handles everything—no matter how many tax jurisdictions there are.

Back to audits: When retailers use sales tax management programs from state-approved Certified Service Providers (CSPs), they never have to host an audit. The CSP deals with the state instead, so the retailer doesn’t need to worry about dealing with state officials and coming up with transaction records.

Rates, audits, returns, the number of tax jurisdictions—with sales tax management services, retailers don’t need to worry about any of them. It’s all taken care of.


New York Times speaks out for sales tax fairness

March 27, 2013

The New York Times editorial board today made a persuasive case for online sales tax. It’s a simple matter of fairness, the piece says, and it goes on to point out why the Marketplace Fairness Act works as legislation:

The bill would not impose new taxes but would enable collection of taxes already due under state laws. It also overcomes the objection that sales-tax collection would be too difficult for online retailers. It requires states . . . to harmonize their sales-tax rules (24 states already have) . . . . It also requires states to provide tax-collection software . . . at no cost, which many already do. [emphasis ours]

Interestingly, the Times finds the $1 million small seller exception—which we’ve seen little criticism of elsewhere—to be unfair to small bricks-and-mortar retailers. But they rightly point out that including the $1 million exception is a matter of political expedience:

Unfortunately, the bill exempts retailers who have under $1 million in Internet sales from the collection requirement. That perpetuates the problem, because a bricks-and-mortar retailer is not exempt based on total sales. As a political concession to win swift passage, however, the exemption is acceptable as long as lawmakers commit to continued efforts to level the playing field.

It’s great to see the New York Times speak out so forcefully and cogently in favor of sales tax fairness. Given last Friday’s vote of 75-24 in support of the Marketplace Fairness Act, it seems most members of Congress agree!


Debunking 3 myths about internet sales tax

March 8, 2013

The reintroduction of the Marketplace Fairness Act has resulted in the reintroduction of myths and half truths about its impact on businesses. In this post, we counter the three main fears about collecting internet sales tax.

Fear: Collecting sales tax is too difficult.

Some point to the fact that, nationwide, there are over 9,600 tax jurisdictions, and they argue that online sales tax collection would be so difficult that online retailers would have to hire additional staff to handle it.

Fact: Fortunately, technology provides an easy answer. Sales tax rates are easily stored and maintained in a database—it doesn’t matter if there is 1 rate or 100,000. Databases easily handle tax exemptions, too, for every location. Everything needed to figure out the correct tax rate is already present during an online sale: the purchaser’s address, the sales price, and the type of item being purchased.

Sales tax management services, which offer retailers an easy way to manage sales tax, have already been integrated with most e-commerce platforms, so starting to collect sales tax can be as easy as checking a box.

The proposed legislation is doing its part, too, to make collecting sales tax easy. It requires that states simplify their sale tax laws before online retailers start collecting, lets retailers file one sales tax return per state, and centralizes the registration process. It also requires states to make available free sales tax software for retailers that can work with all states.

So much for the concern over difficulty; what about cost? Sales tax management services are available at every price point—including free. So collecting sales tax doesn’t need to cost an online retailer anything.

And it’s also worth noting that most online retailers won’t have to collect sales tax at all. Only retailers with over $1 million in annual out-of-state sales will be affected.

Fear: This will give local stores an advantage over online stores.

Fact: Actually, it will correct an artificial advantage that online stores currently have, creating a more level playing field for all retailers.

Right now local stores have to collect sales tax while online stores don’t, which gives online stores the appearance of a price advantage of up to 10%. Even when bricks-and-mortar retailers also sell online, it doesn’t change the basic fact that in their local stores, they have to collect sales tax, while online stores don’t.

If the law doesn’t change to keep up with the way people shop, the logical conclusion is that many businesses will elect to only sell online—which would mean no local shopping. Picture your community without a bookstore, clothing store, or electronics store. That’s not what anyone wants.

Fear: This is a new tax.

Fact: If you live in a state with sales tax, you already owe sales tax on your online purchases. If the retailer doesn’t collect sales tax, the purchaser is supposed to pay the tax due directly to the state. In other words, this isn’t a taxation issue, it’s a collection issue.

Most people don’t know that they owe sales tax when they buy online, and states find it almost impossible to enforce their own sales tax laws online. That’s why the Marketplace Fairness Act is needed: to allow states to enforce their own laws and end the sales tax loophole that favors online retailers over local retailers.


Making it easy for online stores to collect sales tax

January 31, 2013

The final post in our series for Spree Commerce is up! We look at the different ways online stores can collect sales tax—and how to make collecting easy.


Online sales tax and your business

January 23, 2013

In our new guest post on Spree Commerce, we look at how online sales tax collection may affect your business. Take a look!


Why don’t online retailers collect sales tax?

January 9, 2013

We’ve tackled the perennial question of why online retailers don’t have to collect sales tax in a guest blog post for Spree Commerce. Check it out!


Voters support local tax measures

November 16, 2012

Election Results

With the election over, Politico has taken a look at how local tax measures did throughout the country. The result?

During last week’s elections, voters across the country opted to raise taxes to help their cities, counties and school districts.

“I’m OK with being taxed for making sure we don’t go under and people are taken care of,” said Elizabeth Boyd, 35, an independent voter in Sacramento. “I think it’s really good for us to pay for schools and make sure they’re kept open and teachers aren’t being laid off for ridiculous reasons.”

Whether you agree with this outcome or not, the important thing is that the system works: The people who voted on the tax measures both pay the increased taxes and benefit from the services and projects they fund. Which is as it should be.

Still, we can’t help thinking that it would have been better if the increased taxes were unnecessary. Sales tax is due on online purchases but nearly always goes unpaid, to the tune of $23 billion each year. If that money had been collected at the point of purchase, just as sales tax on bricks-and-mortar purchases is, perhaps none of these tax increases would have been necessary.

If you pay sales tax on an online purchase, it doesn’t matter where the online store is—the sales tax you pay goes to your state and local community, where it funds services that voters approved.

Most people are willing to chip in for services that benefit their community. According to the Politico article,

voters tend to have a more favorable opinion about increasing taxes when they can see that the extra revenue will benefit their community directly. A 2010 analysis by The Associated Press found that voters in a large cross-section of states passed 50 percent or more of the local tax initiatives that came before them. . . .

In California, Sacramento voters, who tend to be more conservative than other areas of the state, supported a sales tax hike by a 2-to-1 ratio in addition to two school construction bonds.

“That’s a pretty clear choice of the people,” [Sacramento] City Councilman Darrell Fong said. “They don’t want to see a reduction in service, especially when it is to public safety and parks. They know we’ve made the cuts already.”


Local sales tax on Election Day

November 2, 2012

Vote!With Election Day fast approaching, we’re seeing more and more articles on local sales tax measures that will appear on the ballot.

Any changes in sales tax have to be approved by voters, and in many places this year’s ballot includes a new sales tax to fund local initiatives. No one like paying taxes, of course, but these measures often receive a lot of local support—those who pay the tax are the same ones who benefit from the services it provides.

So what kinds of sales tax measures are appearing on ballots?

In Creek County, Oklahoma, a one-third-cent sales tax would buy much-needed equipment for the volunteer fire department.

In Rifle, Colorado, a three-quarter-cent sales tax would help pay for a new water treatment plant to replace the existing one, “which is old and in danger of failure.”

In Augusta, Kansas, a one-percent sales tax would pay for a new water line that would triple the amount of water carried to the city, without raising water rates or property taxes.

In Deridder, Louisiana, a quarter-cent sales tax would pay for renovations to the 98-year-old courthouse, which has a broken wheelchair lift and no elevator.

In Saratoga, California, a one-eighth-cent sales tax would fund law enforcement programs, emergency room services, and health insurance for low-income children.

In Jackson, Missouri, a sixth-cent sales tax would fund renovations to the public library.

In El Paso County, Colorado, a quarter of one percent sales tax would provide deputies for the understaffed sheriff’s department.

In Little Rock, Arkansas, a half-cent sales tax would pay for a highway improvement program that will create 40,000 jobs.

In Marion, Ohio, a 0.25% sales tax would allow for the rehiring of laid-off police and fire department personnel and help maintain city streets.

In Baldwin County, Alabama, a one-cent sales tax would go to local schools, which currently operate with less per-pupil spending than the state average.

All of these sales tax measures will appear on the ballot in November, to be either approved or rejected by local communities.

But if online retailers collected sales tax—which is already due on online purchases—these measures might be unnecessary.

States are losing out on $23 billion in uncollected sales tax every year—sales tax that shoppers owe but that goes unpaid because online retailers don’t have to collect it. That $23 billion would be supporting these kinds of projects and services without the need
for any increase in local sales tax.

Keeping fire and police departments staffed, maintaining roads, and supporting local schools without any tax increases—just more reasons to support online sales tax.


TaxCloud in the news!

October 11, 2012

TaxCloudWe’re happy to report that TaxCloud and FedTax have been in the news quite a bit lately.

An end to the free online tax ride nears: In this ComputerWorld article, TaxCloud user Ken Knezek, owner of Bandals Southwest, talks about how his small company has handled online sales tax

What the end of tax-free online shopping means for small businesses: Our CEO, R. David L. Campbell, was interviewed for this Reuters article on how small businesses will be affected by online sales tax

How you can prepare to collect online sales tax: And in an article in Independent Retailer, David offers some tips for online retailers who are thinking about starting to collect sales tax

It’s great to see so much attention being paid to the practicalities of what online sales tax really means for online retailers. As we move closer to federal legislation on the issue, we hope to see more articles like these!


Online sales tax collection is about states’ rights

September 27, 2012

At a hearing on the Marketplace Fairness Act before the Senate Commerce Committee on August 1, Senator Lamar Alexander (R-TN) emphasized that for him, online sales tax collection is all about states’ rights.

It’s an argument that seems to have puzzled a lot of people—we’ve seen several articles mischaracterizing online sales tax as a federal sales tax, and there’s some concern that with the Marketplace Fairness Act, the federal government would be getting involved in state issues.

So why did Senator Alexander say that he supports the Marketplace Fairness Act because it’s an issue states’ rights?

First, some background.

If you live in a state with sales tax, your online purchases are already subject to sales tax. If the online store doesn’t collect sales tax when you make a purchase, by law you are responsible for calculating the tax due and adding it to your state income tax return.

But states can’t enforce this law—they can’t check up on every citizen to see how much they’ve bought online and whether they’ve paid the correct sales tax—and they can’t require online stores to collect sales tax like brick-and-mortar stores do.

This is the result of two Supreme Court decisions, Bellas Hess (1967) and Quill (1992). In these decisions, the Supreme Court said that states can require a seller to collect sales tax only if the seller has a physical presence in the state.

Since states can’t a) require an online seller to collect sales tax if the seller has no physical presence in the state, or b) make sure individuals are paying the sales tax they owe on online purchases, they are powerless to enforce their own sales tax laws.

However, Congress can pass a law giving them back that ability, as the Supreme Court noted in their Quill decision. The Marketplace Fairness Act is one such law. It would not demand that online sellers collect sales tax. What it would do is give states the authority to, if they so choose, require online sellers to collect sales tax. It would be up to the states to decide whether and how to tax online sales.

This is why Senator Alexander called the issue a matter of states’ rights. States are currently powerless to enforce their own sales tax laws; the Marketplace Fairness Act would restore that power to them.


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