It’s estimated that there are over 100,000 online retailers. According to the U.S. Census Bureau, e-commerce sales for 2013 topped $263 billion.
However, sellers on Amazon.com are facing compliance challenges due to thousands of tax jurisdictions in the United States.
Internet Sales Tax
Starting in May 2014, Amazon.com will collect 6 percent sales tax in Florida, which will affect as many as 20 million consumers in the fourth most populous state. Web retailers are required to charge a sales tax if they have a physical presence in the state. Amazon.com, the world’s largest online retailer, is building two warehouses in Ruskin and Lakeland, near Tampa and Orlando, respectively.
Including the Sunshine State, nearly 190 million Americans are now subject to sales tax when making purchases on Amazon.com. Florida is the 21st state to charge a sales tax, which will add nearly $80 million in revenue. Later this year, Maryland — and its 6 million residents — will be the 22nd state to add sales taxes on goods bought through Amazon.com.
Hawaii is close to passing an online sales tax legislation. Amazon is building a fulfillment center in Connecticut.
Compliance Challenges
The regulatory environment is imposing compliance burdens on thousands of small businesses that sell goods on the Web. For example, many sellers on Amazon.com must calculate taxes that customers owe on their purchases.
“In accordance with state tax laws, the total selling price of an item will generally include item-level shipping and handling charges, item-level discounts, gift-wrap charges, and an allocation of order-level shipping and handling charges and order-level discounts,” according to Amazon’s website.
Excluding Florida and Maryland, items shipped to the following destinations are subject to tax: Arizona, California, Connecticut, Georgia, Indiana, Kansas, Kentucky, Massachusetts, Nevada, New Jersey, New York, North Carolina, North Dakota, Pennsylvania, Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin.
Changes in the regulatory environment have caused some online sellers to turn to tax software that calculate amounts for platforms such as PayPal, eBay, Amazon.com, and Shopify. Software vendors collect and aggregate the data needed to pay taxes for specific counties and cities.
Calculating Sales Tax Liability
The tax amounts are complicated by jurisdiction, which may include different local and state taxes. For example, Arizona has 18 self-administered local tax jurisdictions on top of more than 70 state-administered jurisdictions.
“A few cloud-based services exist to help small ecommerce companies with the pain of handling sales tax reporting requirements, but at a cost,” said Webb Stevens of tax software firm Avalara, based in Washington state. The company helps ecommerce sellers and online businesses obtain sales tax reporting information across more than 12,000 tax jurisdictions in the United States.
The stakes are high because Amazon is seeing record growth for Marketplace Sellers with businesses of all sizes. In 2013, Marketplace Sellers on Amazon sold more than a billion units worldwide. The number of active Marketplace Sellers using Fulfillment by Amazon (a shipping service) grew more than 65 percent year-over-year worldwide, according to a company statement.
Some software providers offer back-taxes reporting capabilities for sellers that did not collect taxes in the past. However, most online sellers are likely to see increases in overhead to comply with stricter government regulations.
Amazon offers this statement on its website.
“The amount of tax charged on your order will depend upon many factors including Identity of the seller, type of item purchased, and destination of the shipment,” according to Amazon’s tax guidance on its website. “Factors can change between the time you place an order and the time of credit card charge authorization, which could affect the calculation of sales taxes. The amount appearing on your order as Estimated Tax may differ from the sales taxes ultimately charged.”
“Establishing and running an ecommerce business is hard enough without the worry of when and how to file your sales tax,” said Stevens.