The e-commerce sector has seen a shift in the last few years with increasing sales being conducted over the internet. With this rise, comes additional complexities such as the taxation of goods and services being sold over the internet. Understanding the nuances of taxation can be tricky, but a few key learnings can help creators begin to navigate this world and understand sales tax for small business owners.
Thinking beyond sales
“Sales tax” is a good place to start demystifying the nuances of the tax world. Sales tax is generally applied on the sale of goods and services by all but five states in the US, as well as at the county, city and district levels. Sales tax represents a significant revenue source for most states, generally around 35% of their general fund revenues.
The combined sales tax rate we pay on a purchase reflects the total of tax rates levied by the state, county, city and district (if applicable). These rates change frequently, which is one of several high-level trends that leaders of businesses who are newly subject to sales tax—or subject to sales taxes in new jurisdictions—should keep in mind.
The way e-commerce sales are taxed has transformed
In 2018, the US Supreme Court issued its 2018 South Dakota v. Wayfair ruling. From a tax perspective, the decision was historic, and it has since sparked a flood of new sales tax considerations for sellers who conduct transactions with buyers located in different US states.
Before the ruling, the determination of whether or not a transaction was subject to sales tax was largely determined by the seller’s physical location. After Wayfair, that tax “determination” became based on the amount of sales a seller transacts with the buyers in each state and whether the product or service sold is taxable within the buyer’s state.
Post-Wayfair rules let states impose sales tax on out-of-state transactions if certain economic “nexus” thresholds are met; the thresholds are based on transaction volumes or revenue amounts. The Wayfair decision also drove more states to require marketplace facilitators (MPFs)—online platforms like Amazon, Teachable, and many others—to calculate, collect and remit sales tax on taxable purchases where economic thresholds or physical presence have been met. Almost every state that imposes sales tax now has some type of marketplace facilitator provisions in place. (Editor’s note: To read more about Teachable’s response to US sales tax and EU VAT, please read here.)
Sales tax rules and rates change frequently
More than 3,500 sales and use tax changes, an average of 350 per year, have occurred since 2011. During that same time period, an average of 220 new sales taxes were introduced each year.
More sweeping tax changes loom
States, cities, localities and districts gain the revenue they need for their operating budgets from different types of taxes. Thanks to COVID-19’s economic damage, most of those budgets are in dire shape. These revenue gaps will force state and local governments to consider tax rate changes and, quite possibly, new forms of taxes (e.g., those on B2B services). Those changes will almost certainly play out in 2021 and beyond.
Given that likelihood, it makes sense to continue to build upon your tax education and stay up to date with the ever-changing tax landscape as a small business owner and creator.
This article is for informational purposes only and does not provide any legal or tax advice. This article was written by Vertex, Inc., a global provider of tax technology solutions. Teachable is not affiliated with, nor does it endorse, any information contained in this article.