NEW BUSINESS OPPORTUNITIES AND CHALLENGES CREATED BY THE INTERNET…
The age of the internet and now the Covid crises has created a world of new business opportunities and challenges for Americans ranging from online sales to GIG workers. A focus on multistate sales tax.
Most states do not require sales tax to be collected on casual sales, and each state determines the threshold on what are, and what are not a casual sales, and this threshold is usually based on the number and dollar amount of sales. Thus, an individual who occasionally sells used personal property is not required to collect sales tax from the buyer and then remit it to the state or other taxing jurisdiction. As regards large sales of registered property, such as used vehicles or boats (with motors), the buyer would pay the use tax to the Department of Motor Vehicles at the time that the vehicle or boat was registered. Another example would be that someone who sold used personal property at a yard or tag sale are not required subject to sales tax requirements.
Multistate sales tax was a basic concept, and many of those laws remain in existence today. The premise of these laws was twofold. First the intent was to avoid double taxation of personal property sold to a buyer who would resell the same item. Secondly, the intent was to eliminate the burden of registering and collecting sales tax on sellers who sold their merchandise out of state. Paramount to this was the concept of “nexus”. If a vendor had “nexus”, or sufficient presence, within a state then they were required to register to do business in that state or local jurisdiction and obtain a permit to collect sales tax from customers in that jurisdiction who purchased their merchandise. So if a New York business, for example, accepted orders from and sold their merchandise to out of state purchasers, unless they had sufficient nexus to require that they register to collect sales tax from end user customers in that state, they were not required to collect sales tax and remit it to that state. To avoid double taxation on a single item, the concept of “end user” applied, so resellers would provide their vendors with “resale certificates” in order not to pay sales tax to the vender from whom they purchased the merchandise but when they sold the item to the ultimate user of the item, if that customer was located withing the jurisdiction where they were registered, they would collect sales tax assessed upon the total value of the item. If shipping and handling were included in the total price then sales tax was charged on that total price. Alternatively, if shipping was invoiced separately, and the item were delivered by a common carrier (such as the USPS, UPS or rail), the shipping charge (or freight) was not subject to sales tax (as sales tax was paid by the common carrier business based on its sales, unless it was a government exempt organization). Ultimate users of the purchased property were required to pay a “use tax” to the sales tax jurisdiction where they were located (and registered if they were a business). To summarize, only the end user would pay sales tax and paid no sales tax on separately billed shipping charges that were not included as “free shipping” with the item’s price. Another key concept was (and still is) where the sale (or transfer of legal title) took place (a/k/a the F.O. B. shipping point). That was determined by the point in time that legal responsibility for the item transferred from the seller to the buyer.
This was often of paramount importance to sellers and buyers of catalogue sales; however when the internet began to evolve around the time of the turn of the millenium, along with the opportunity to facilitate multistate sales over the internet, chatter regarding an “internet tax” began to evolve as well. That is when states began to realize that they were losing substantial sales tax revenue on internet sales. That is when taxable jurisdictions (such as New York) began to require individual purchasers (non business) who were the ultimate user of the property to voluntarily remit their use tax along with their income tax return. However not everyone was complying with use tax laws and enforcing it was virtually impossible.
GAME CHANGER FOR ONLINE RESELLERS – ECONOMIC NEXUS
In June, 2018, however, a U.S. Supreme Court decision was handed down in South Dakota v. Wayfair that was a game changer for on line resellers by creating a concept to become known as Economic Nexus. The result was that online venders of one state, who sold to customers who were located in another state, would have what became known as economic nexus in the destination state, regardless of where title changed. Each state would determine the threshold for sales tax registration and compliance. For example, assume a state had a compliance threshold of any number of sales totaling $100,000 or 200 or more sales totaling more than $25,000 sales. These sellers would then be required to register and apply for a sales tax permit in that jurisdiction if they met that threshold.
As marketplace facilitators bring together buyers and sellers from all different jurisdictions. Up until the Wayfair decision, they were absolved of any sales tax obligations, other than their own on fees charged to its customers, and they too were subject to physical nexus rules. As a result, online sales mostly escaped sales and use taxation. However, Wayfair changed all that. States began imposing requirements that online marketplace facilitators such as eBay, ETSY and Amazon begin collecting sales tax (on behalf of the seller) based o the rules of the destination state, and their threshold was based on the number and dollar amount of the transactions conducted through the market facilitator. Thus if a seller located in New York sold to a customer located in Illinois, the facilitator would include sales tax on the final value fee paid on the item, regardless of whether it was or was not a casual sale, and sales by individuals and not only businesses wee also being charged sales tax. The individuals are not subject to any requirement to obtain permits or sales tax compliance.
DOUBLE (OR MULTIPLE) TAXATION
But what about double taxation? An individual who needed to make a few extra dollars by selling merchandise on eBay that they purchased online through a facilitator, paid sales tax when the item was purchased. However, when that same item were resold through a facilitator, it was taxed a second time, and every times that it was resold. Thus that item, such as a collectible coin (while the transfer of currency for market value is not subject to sales tax, currency that is deemed collectible (sells for more than face value), is taxed multiple times.
To mitigate this situation, marketplace facilitators now provide their customers the opportunity of purchasing a sales tax reseller permit. eBay, for example, will “sell” their members, for $125, a sales tax resale permit that enables the customer to purchase an item without paying sales tax, but they the sale to a non permitted buyer is deemed a sale to an end user and thereby subject to sales tax. But for this to make sense, the total amount of sales tax applicable to their purchasers, needs to exceed $125. Alternatively, a business that is registered for sales tax within a jurisdiction, is permitted to provide the marketplace facilitator with a copy of the resale. Many jurisdictions have a provision that enables them to avoid the registration and compliance requirements to businesses that sell ONLY through marketplace facilitators a waiver from registering and complying with sales tax requirements, thus shifting the entire sales tax burden onto the facilitator unless they otherwise are meet the threshold through their online direct sales (I.E. through their company website). However, there are those who include sales through facilitators with online direct sales in their threshold. So assume the state has a $100,000 threshold and they sell $75,000 through a facilitator and $50,000 directly, they would meet the threshold for sales tax compliance in that jurisdiction.
It is pf paramount importance to understand that sales tax collection and remittance is a FIDUCIARY responsibility. Failure to comply with sales tax requirements can lead to personal liability and criminal exposure for not only business owners but their directors and officers who can be held personally responsible and accountable. That means that they could be held personally responsible for payment of unremitted tax as well as financial and personal penalties-plus the cost of legal defense.
A SALES TAX LABYRINTH
So as you can see, the world of online sales and use of a marketplace facilitator has created its own world of complicated and intricate passageways and possibly blind alleys with items being taxed multiple times, to resale businesses possibly purchasing permits while still failing to meet their own sales tax requirements. The issues and potential problems are many.
A WORD ABOUT INCOME TAX
Up until 2022, marketplace and payment facilitators (a/k/a Third Party Service Organizations-TPSOs, and Electronic Payment Facilitatos-EPFs) were not required to notify the IRS of sales transactions until they exceeded 200 transactions and $20,000. However, beginning January 1, 2023 (the rules were extended a year) any number of transactions that exceed $600 will need to be reported to the IRS on Form 1099-K. Although the rules were intended by The American Rescue Act to be effective for 2022, the IRS realized the complicated mess that was created and the burden it will create for the TPSOs and the EPFs, not to mention the IRS will need to sort this out and respond to taxpayers who received incorrect forms that were fed into the IRS computer thereby generating large deficiency notices, penalties and interest, especially when gifts are erroneously reported as merchant sales as well as potential duplicative reporting by EPFs such as PayPal or Venmo and TPSO Marketplace Facilitators such as Etsy, Amazon or eBay. This alone would keep the 87,000 new IRS agents occupied.
If you are an occasional seller or reseller of items, such as collectible coins (even if your selling junk coins for their melt value-it is still deemed a collectible subject to tax), the buyer of your item will pay tax to the facilitator. If you buy something for a low price and resell it, you will pay sales tax on the purchase of the item, and then you will pay a facilitator fee on the value of the item often including shipping and handling, even if separately stated. If you use “free shipping” as a sales incentive, that amount will be subject to sales tax, thus mitigating to some extent, the benefit of free shipping to the customer.
If you are a business selling online, either directly or through marketplace facilitators, you need to understand the rules of the states in which you customers are located and comply with those rules. If there is duplicative payment of tax by you as a buyer and then when the item is resold, you need to understand how this may impact your business and how you need to deal with this as a business. If a state or taxing jurisdiction includes marketplace facilitator sales in the threshold for total sales in determining whether or not you need to register, obtain resale sales tax permits and file sales tax returns (even if you don’t owe tax), you need to understand with and comply with these requirements (or your tax accountant needs to understand).
The internet, and now Covid has created new opportunities for self employment or to make money as a GIG employee or independent contractors.