Sales tax notice reporting is one of those responsibilities that can keep business owners and the self-employed up at night. As nice as it sounds to work from home running a business, being a remote seller is a journey riddled with complexities that go well beyond product selection and marketing.
Where It All Started
Long before South Dakota v. Wayfair introduced the concept of economic nexus to business owners, states around the country already had laws in place for the collection and remittance of use tax. Consumers were increasingly turning to ecommerce to make purchases, leaving states with dwindling revenue. They turned their efforts to enforce their newly confirmed ability to collect sales and use tax from retailers around the country.
Well in advance of Wayfair, Colorado became the first state to take their use tax regulations to another level. Their sales and use tax statutes mandate that transactions that fall below the sales tax collection threshold ($100,000 in Colorado) be subject to specific—and burdensome—use tax requirements. A dozen other states soon followed, with most states now having similar provisions.
Sales Tax Reporting Requirements
Out-of-state sellers are required to navigate a second set of rules in addition to nexus obligations that vary by state. Colorado’s term for these remote sellers is “non-collecting retailer” and that too, varies from state to state.
Pro Tip: Marketplaces such as Amazon, eBay, and Etsy have their own requirements for collection and remittance of taxes. If you sell on these or similar platforms, ensure your accounts are set up properly to make certain that the correct taxation rates are applied.
Each state defines their own rules and regulations but for the most part, they require sellers to:
- Notify each customer of their potential liability for use tax at the time of the sale.
- Provide an annual purchase summary to their state’s purchasers by a specific date (often January 31st).
- Turn over customer details and transaction or summary records of the sale(s) to each state.
While some states have a minimum sales dollar threshold for issuing the customer statements and summary reports, others have none and expect ALL customers to receive these notices. Likewise, while most reporting is annual, some states require monthly reporting when a transaction dollar threshold is met. Add understanding these details to the many tax rates and due dates of nexus that remote sellers are expected to know, then their actual application to the business, and the comfort of running a business from home starts looking miles away.
Penalties and Compliance
Penalties for not complying with state sales tax notice laws vary substantially between states. While some states have no penalties helping to enforce compliance, Georgia’s regulations allow for charging penalties for each customer record—$5 for failure to file, $10 for not sending an individual statement, and $10 for not remitting each missing record to the state. Other states, like Pennsylvania, impose a percentage rate on the amount of the use tax that should have been remitted.
Court challenges continue to be mounted against states, and some states have voluntarily rescinded their earlier regulations (Washington, July 1, 2019). The Supreme Court upheld Colorado’s right to implement and enforce its notice-and-report law, finding that it didn’t violate the U.S. Constitution because it was a report law rather than a tax.
Complications and Solutions
If sales tax notice reporting requirements seem over-the-top, you’re not alone in thinking that. And frankly, they’re meant to be. The intent of these cumbersome business reporting requirements isn’t necessarily to have you comply with them, but to motivate you to begin to collect and remit sales tax to the states instead. In contrast, it’s a simpler process.
Sales and use tax laws will continue to be changed and challenged and the burden to keep up with them remains with the business owner. Both types of tax and their associated notices and requirements are applied on different products with tax holidays, various regulations about sales at tradeshows and craft fairs, and with countless exceptions and tax holidays across the country.
Despite Senate hearings in 2022 on how damaging these tax laws are to small businesses, the majority of them remain in place. Businesses should leverage their use of software when possible and utilize online resources to conduct research on state requirements. Many individual articles—including those on some tax software websites—are outdated and should only be used for general guidance, rather than interpreting state-level details as their current requirements.
Let’s Make Managing Your Sales and Use Tax Easier
As it’s no easy feat, REDW State and Local Tax experts are ready to partner with you to find practical solutions for managing your tax obligations. We look forward to helping you and developing a solution that is as unique as your business. Contact us to start a conversation or ask a question.
