One of the biggest headaches for online retailers is state and local sales tax compliance.  There are thousand of tax jurisdictions with their own rules.  This isn’t so bad when it comes to traditional brick-and-mortar stores; you charge the tax for the jurisdiction your store is located in and your obligation is done – is it then up to the buyer to pay any use taxes that may occur as a result of this transaction.

Then the internet comes along, and now sales take place everywhere.  How does a company keep up with all of the jurisdictions and their different treatments of sales tax?  Not to mention all of the changes to the tax codes for these jurisdictions – it is estimated that tax rates change nearly two times a day throughout the United States.

Many companies don’t comply with these regulations.  Not out of disregard for them, but because they simply aren’t aware that they exist.  When they are subject to a sales tax audit, the situation often winds up being messy; according to this whitepaper written by Geni Whitehouse a company was charged over half a million dollars by the state of New York on $19 million dollars of sales between March 2001 and May 2004.

State and local governments have started to crack down on collecting sales and use tax.  And small wonder; it was estimated that in a recent year, over $20 billion dollars was lost due to uncollected taxes.  Since most states obtain a significant portion of their revenues from sales tax (at least 25% for 35 states, according to Whitehouse), many states have been subjecting businesses to sales tax audits far more frequently.

History Regarding the Sales Tax Issue
The problem of sales taxes in multiple jurisdictions came about long before the internet even existed.  Catalog sales with mail order delivery first brought this problem to light.  More often than not, the seller and buyer were located in different jurisdictions and there were no solid guidelines on what tax rate had to be paid…and to whom.

In 1992 the State of North Dakota sued Quill Office Products for sales tax on purchases from Quill made by North Dakota residents.  Quill's counterargument was that it didn't owe the tax because it didn't have a physical presence in the state.  The case eventually went to the Supreme Court which ruled in Quill's favor.  Revealing is this quote from the Tax Foundation's website:

The Supreme Court’s reasoning was at least partially based on the fact that, at the time the case was decided in 1992, there were over 6,000 separate sales and use tax jurisdictions in the United States (states, localities, special tax districts, etc.) and to impose a collection obligation on a remote seller would impose a crushing burden that would severely restrict interstate commerce.

However, there has been a movement towards overturning this decision, especially since as noted above states are seeking sources of revenue to help deal with huge budget deficits.  Even more confusing is the ambiguity of defining what constitutes a physical presence (or "nexus," at it's commonly referred to in the legal and accounting fields).  Such confusion is no doubt a contributing factor in the New York state case cited above.

The Solution? SaaS
Now the situation is magnified by online sales.  Sales take place much more often, and in the meanwhile the number of tax jurisdictions has more than doubled since 1992.  One could quickly get the impression that the internet has made the situation much, much worse.

Ironically, the internet is also the force behind what appears to be the solution to this problem.  The concept known as Software as a Solution (SaaS) lends itself to solving problems just like this.  SaaS is somewhat like paying rent; you access the software online and pay on an as-needed basis.  The chief advantage of SaaS is that you don’t need to update the software constantly; you always have access to the latest information and software versions as soon as they are available.  For sales and use tax SaaS, the software provider updates sales and local tax rates and charts and even files the necessary tax forms for you.

The biggest break for online merchants comes from the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA was designed to bring some order to this chaos by setting standards in an area where more previously existed.  While there has been some success along these lines, one of the more significant provisions is that the automated solution provider, and not the business owner, would be held liable for certain types of errors.  Merchants could spend more time focusing on making sales and less on worrying about compliance.

For more information regarding how to set up your accounting software to work with one of these services, we invite you to call us at (215) 702-8155 or send an e-mail to info@kastechco.com.