E-commerce sellers enjoy the perks of selling their goods and services to people across the nation, but they also have to bear the pain of collecting sales tax as per the state regulations. Hence, it is important to know the nuances of sales tax for every online seller. It is also pertinent to understand the concept of sales tax holidays as it impacts both the seller and the consumer of goods. As an e-commerce vendor, you should understand how these tax-free periods can affect sales tax and the best way to prepare for them.
Initially, sales tax holidays were the concern of only in-state businesses, but now they can affect online vendors with no physical presence in that particular state. If not handled well, they can create a lot of confusion in sales tax compliance. Here is a guide for e-commerce portals to understand the fundamentals of sales tax holidays and their implications on e-commerce sellers.
What is a sales tax holiday?
A sales tax holiday is a time frame where the state allows consumers to buy some items without tax, making it cheaper for the consumer to pick up stuff. States offer these taxes to encourage consumer spending, but they are applicable only above a certain amount. They can be levied at any time of the year but the most popular time is July and August. They come under these following categories:
- Back-to-school: These could include clothing, footwear, computers and computer supplies, books, stationery and more.
- Clothing and footwear
- Sustainable home appliances
- Harsh weather preparedness things: It could have portable generators and other emergency supplies.
- Second Amendment: May include firearms, ammunition and hunting supplies.
Things to look out for during sales tax holidays
All e-commerce sellers need to be more vigilant while selling items during the sales tax holiday period. If you are selling in any state levying sales tax holidays, you need to understand how these tax-free periods can affect sales tax compliance. Look out for these things for better understanding of sales tax holidays:
Start and end time
Usually, the sales tax holiday period is in the summer, in July and August when the schools are about to start. However, they can take place at any time of the year. For instance, in 2021, in 18 states in the US, the first two tax-free periods were in February, while the last one is due to occur after Thanksgiving.
However, every sales tax holiday starts and ends at a particular time period or on a specific date. For instance, in Florida, the back-to-school sales tax holiday for 2021 started on 31st July and ended on 9th August, while in Virginia, the date and time are more specific. The 2021 sales tax holiday started on 6th August at 12:01 am and ended on 8th August at 11.59 pm.
Thus, it becomes essential to calibrate the point-of-sale systems to the exact minute so that the sales tax is not applied wrongly. Once the time and location of the sales tax holiday are decided and factored in, you can further refine its scope.
You will need to set your point-of-sale systems after weighing the participation options in that particular state. For instance, you will have to determine if you need to take part in the state’s sales tax holidays, if you must collect or exempt the local taxes and if you are allowed to take tax on non-qualifying items, in case you wish to.
In the majority of states in the US, sales tax holidays are compulsory, but some local tax jurisdictions, which are cities and counties, allow businesses to opt out of it, like Missouri and Alabama. The Alabama Department of Revenue and Missouri Department of Revenue publishes a list with participating and non-participating cities and counties. However, these lists could change every year and one will not know the final list till the end.
On the other hand, there are many states in which it is compulsory to take part in sales tax holidays while some states give a choice in a few of the sales tax holidays. For instance, e-Commerce sellers need not be a part of New Mexico’s back-to-school sales tax holiday, but it is mandatory to take part in the Massachusetts tax-free period. Similarly, in Iowa, all businesses have to participate in the sales tax holiday and cannot take sales tax even on non-qualifying items. In contrast, in Texas, sellers can pay the sales tax themselves and not pass it on to the consumers.
Most of the sales tax holidays have price restrictions on them. For instance, in many US states that temporarily forego clothing under sales tax holidays might have a dress costing $50 for exemption, but a dress worth $250 might not fall under any exemption
There are some exceptions to this rule. For instance, in Maryland, during the tax-free period, all energy-efficient appliances are exempted from taxes without any price caps on them. Even in South Carolina during the August sales tax holiday or in Mississippi for ammunition, firearms and hunting supplies. There are no caps or price ceilings on these products.
On the other hand, Massachusetts has levied a simple cap of $2,500 per on any single item. While in Florida this year, during the admission and recreation sales tax holidays, the first $50 of the price of safety flares and the first $75 of the price of paddles are exempted.
It might sound very technical and tedious, but with sales tax automation systems, you can easily exempt the items that have sales tax holidays and put a tax on the others.
Differing rules for Layaways
Layaway is a delayed payment method where the customer needs to make a payment for a product within a given time frame else it will be put back on sale. Every state in the US has differing rules for layaways. For instance, in Texas, customers can pick up qualifying products tax-free if it is on layaway or if the final payment is made during the sales tax holiday period.
While in Connecticut, there are no taxes on the installment payments if a customer buys a product on layaway during the sales tax holiday period. But there will be a Connecticut sales tax for the final payment of a product on layaway before the sales tax holiday time period.
Hence, it would help if you found out exactly when the sale is made and in which state before deciding on the tax or its exemption.
Sales tax and economic nexus
Nexus is a way for states to impose a sales tax in states where you may not be registered to remit or collect tax. During sales tax holidays, the sales tax obligations increase. Thus, your nexus spread also increases. Most states allow businesses with low sales below the economic nexus to be exempted, but this limit differs in every state. For instance, in California, you will not have a nexus till you make $500,000 in the sale of tangible personal property in the current year or the previous one. However, you will have to register in Arkansas after the 200th transaction, whatever may be the sale value.
Economic nexus must be considered during the sales tax holiday period as sales increase during this time. An increase in sales could make you go beyond the economic nexus and then you would need to register with that state and collect taxes on every sale.
Usually, sales tax holidays are for specific purposes such as back-to-school or emergency preparation. Hence, only products falling under this category will be exempted from sales tax. For instance, clothing and school items will not be charged tax during the back-to-school tax holiday. Similarly, generators and batteries will be exempted during the emergency preparation tax-free period.
However, within this category also, a few products that will not be covered in some states. For instance, in Mississippi, sales tax holiday raincoats will be included but not roller skates. Also, you might have qualifying items, but it will be taxed if it goes beyond the price restriction.
How to prepare for sales tax holidays?
Keeping track of sales tax liabilities can be quite arduous, especially when every state has a different regulation during the sales tax holiday period. It might include applying for sales tax permits in different states. Small e-commerce businesses might find it more challenging as bigger ones like Amazon can use resources and money to handle these compliance issues.
However, smaller and new e-commerce sellers needn’t be disheartened. There are many ways to prepare for it.
Sales tax nexus
It is essential to find out which states have sales tax holidays and if you have any sales tax nexus in those states. Always check back close to the holiday weekend as the rules keep changing for every state.
Find out which products are taxable and at what rate in the state where you have sales tax nexus. For instance, if you have a clothing business, but your state has an energy-efficient tax holiday, you will be unaffected. Once you know whether your products are tax-free during a specific time period, ensure that your cart and marketplaces are compliant because not all of them handle tax-free holidays automatically. It is important to configure the systems for the proper exemption.
Technology to the rescue
e-commerce businesses can take the help of technology. You can use point-of-sale (POS) systems along with the latest accounting software to process different state sales tax laws.
Monitor state-wise payment deadline date
When you have to pay tax or collect on every sale from different states, you need to track the deadline date for each state. It is best to create a calendar and mark the deadline for each state to ensure that the payments are made on time and to the proper authorities.
When you register with any state, you should have a filing frequency for sales tax. It could be monthly, quarterly or annually. Every frequency comes with its due dates, which can change with holidays, weekends and some other factors. Thus, always check up on the exact dates.
Remitting sales tax
Every state has a different style of filing and remitting e-commerce sales tax. Some states may ask you to file online, while others will be okay with a cheque. Check out the method for all the states applicable to your business.
Sales tax permits
Every state requires you to have a sales tax permit to continue selling in that state even if you don’t have a physical presence there. Thus, it is pertinent that you get these permits. The rules to obtain or qualify for these permits keep changing to keep abreast with the latest happenings
Understanding tax penalties for mistakes and delays are as crucial as knowing the sales tax law itself. There could be legal implications for not paying the tax on time, so beware of filing tax on time.
Navigating sales tax can be a tedious task with so many rules to follow. Keeping on top of these forever-changing e-commerce sales tax laws is tricky. You need to know how much sales tax will be charged (if any) as well as how it will be collected, tracked and paid. You need to have set systems and processes that will ensure that the taxes are paid on time. In addition, the sales tax holiday rules for every state differ, making it more difficult to keep track. Understanding the above-mentioned basic but often overlooked issues should help you get a grip on things with some help from proper point-of-sale (POS) systems with the latest accounting software.