Episode 43 is the first of four shows in a series on eCommerce and Sales Taxes. In this show, we talk with Jake Estes, Business Development Manager at Avalara, who is the sponsor for this series. Jake shares with us the big picture of sales tax for your online businesses and the essential needs you should be considering.
We chatted about:
- When a merchant needs to start collecting and paying sales tax
- Knowing which states you should collect tax in
- If you need to collect for both the local tax jurisdiction and the state level jurisdiction on every sale
- Whether zip codes really suffice for getting the right sales tax
- How to know which products you should tax and not tax
- What you need to do to help keep sales tax collection and filing on target for your business
Thanks to Our Podcast Sponsor: Avalara
Bob Dunn: Hey everyone. Welcome to our show. Bob Dunn here, also known as Bob WP on the web. Today is not only episode 42, but the first part of a four part series. For four Mondays, we will be talking with a special expert or experts and our sponsor about an important aspect of running an e-commerce site.
Since this is the second series we’ve had, the first being on security, what better topic to segue into than sales tax? Yep. You heard it right. If you sell online, you do need to know if you are responsible for sales tax and there are just so many variables, so many aspects of it and of course, so many laws, that you want to make sure you are heading in the right direction.
To help guide us through this maze, we have my friends over at Avalara and today we have Jake Estes, Business Development Manager from Avalara. Welcome to the show, Jake.
Jake Estes: Hey. Thanks Bob, great to be here. Thank you.
Bob Dunn: Jake, I’m just going to ask you, where are you located?
Jake Estes: Avalara is headquartered downtown Seattle, Washington, so I’m in the corporate office here. We also have offices all over the world now, but most of us are in Seattle.
Bob Dunn: Yeah. Very cool. I’m about a three-hour drive from Seattle, so I’ll have to come up and have a tour of your offices sometime.
Jake Estes: Absolutely. You’re welcome anytime.
Meet Jake Estes and the Avalara team
Bob Dunn: Cool. For the first show in this series, we’re going to look at the big picture and the sales tax essentials needed for an online small business and as we do more in this series, we’ll be focusing down on some really need to know topics.
Before we dive into the depths of sales tax, can you tell us a bit more about Avalara and what you provide through your services, Jake?
Jake Estes: Yeah. Absolutely. Here at Avalara, our bread-and-butter is sales and use tax. Our flagship product is AvaTax, which is a cloud-based tax engine that can do sales tax calculations for all 13,000 different tax interest jurisdictions in the US, down to the rooftop level, as far as accuracy goes.
The calculations are one piece. We can also help file and remit those taxes back to the jurisdictions as well, so it becomes a real hand-to- hand compliance offering. You come on board with Avalara and you really just set it and forget it. Sales tax becomes something that you don’t have to ever worry about.
Bob Dunn: Yeah. I’m a huge fan of you guys because, it was interesting, I was always doing workshops on e-commerce, a lot of times it was around WooCommerce and stuff and whenever I get talking about sales taxes, I’d say, “Okay. Here are all of the settings for your sales taxes, but to be honestly, I think you should just go hire somebody.”
Jake Estes: Yeah. No, exactly and a lot of folks are very much used to just keying in rates themselves, checking in on an annual basis or a quarterly basis but as your business grows, it gets a little more burdensome and it takes up more of your time.
When should a small business start worrying about collecting and paying sales tax?
Bob Dunn: Definitely. You want to spend more time on the other stuff. Let’s dive into these questions. I’m going to start with a very general one at the first here. If I’m a small business, in what scenario should a merchant start worrying about, or thing about, I should say, collecting and paying sales tax?
Jake Estes: Before they even make their first sale, I would say. Generally all B to C businesses have to collect sales tax, assuming they’re one of the forty-five states that levies sales tax. That said, it’s taxes, so it’s sort of inherently nuanced.
For example, if your home office is in a state like Oregon or Delaware where there’s no sales tax, but you are drop-shipping from a warehouse, let’s say in a centrally-located state like Texas, you’re all of a sudden liable for sales tax in Texas and all of the rates within that state. It gets tricky as your business grows and you go from just shipping out of your garage to leveraging other services and partnering with other businesses.
How does a merchant know which states to collect in?
Bob Dunn: Yeah. You touched on that a little bit and I think that’s where, like you said, it gets very tricky, how a merchant knows which states to collect in. Is there some initial guideline to help them understand that a little better or is it just, you have to start looking at, I’m selling here, here, and here and I just need to start checking into each one of those?
Jake Estes: Yeah. Yeah. Exactly. They’ll have to examine their business and say, “Hey, you know, where am I, as far as operating in different states?” You figure out where you have sales tax nexus, which is just this concept of having a significant physical presence in a state. It’s complicated because every state has a different set of laws on the books, requiring what defines a physical presence.
Some ones that we find here, and they’re pretty common amongst all states, are having a PO Box in a state, a traveling sales rep. If you’ve got someone out on the road going to trade shows or doing on-site sales, that often triggers it as well the drop-shipping, like I mentioned.
Using a platform like Amazon FBA, having a marketing affiliate in a new state, doing some sort of installation or consultation, will often trigger an access. Then, there’s all sorts of ones out there that are less common, but the states are constantly changing and adding to their definitions of nexus, so it really requires some research to do business.
Bob Dunn: It’s mind-boggling to me. It’s like, as I said, I think people don’t really know what they’re getting into when it comes to that and when you’re talking about which states to actually collect in, there are probably local tax jurisdictions and state level jurisdictions. Does an online seller have to collect both on every sale or does that depend from state to state?
Jake Estes: It depends, which you love that answer. They’re twofold. Generally, what most states that collect sales tax do is that there might be a thousand different tax rates or jurisdictions in a single state, or five hundred, or whatever it is and what they’ll do is, you file one return to the state and the state divvies up that and then sends it out to the jurisdictions to fill their coffers.
There are a handful of states that are referred to as home-rule states, where not only do you have to file the taxes with the state, but also at the local level you have to file a return. States like Colorado, Alabama, Alaska, Illinois and Arizona are home-rule states, so not only are you responsible for calculating the correct rate, but also filing separate returns to individual jurisdictions within the state, which takes even more time and energy from your business.
Is knowing the zip codes enough to get the sales tax rates right?
Bob Dunn: When I’ve talked to some people about sales tax, especially when it gets to the local city’s sales tax and then it get broken into actual zip codes where it seems like it can vary in itself, does knowing those zip codes suffice for getting the right sales tax rate?
Jake Estes: Absolutely not. No, no, no, no, no. This is one is a terribly common misconception. You’ve got an entrepreneur launching their business and they assume, “Hey, you know, I’ll just use zip code rates. I’ll go to some B website that provides zip codes tables, I’ll plug it into my e-commerce shopping cart and I’m good to go.”
The issue with that is that the USPS developed the zip code system in the 1960’s to get mail delivered more efficiently, not to set sales tax rate boundaries with. The states have made their jurisdictions independent of the federal zip code system, so while there may be some overlap, it’s not an accurate way to calculate or determine a sales tax rate.
For example, there’s a city South of Denver called Greenwood Village. It is in a zip code with four different sales tax rates, so if you were to apply a zip code rate and you make a sale there, you might be wrong three different ways. It’s really not a safe way to do it. A lot of folks say, “Hey, I don’t care. I’m just going to plug in a zip code table,” but when they get audited and the state comes back and says, “Hey, you calculated an incorrect rate here,” they quickly learn their lesson. It’s not a process to rely on for your compliance.
Bob Dunn: Mm-hmm (affirmative). I wondered about that because I hear some people talk about that as far as, “Oh, I’m just going to put in these zip codes. It seems like this works fine.” When I thought about it myself, I thought, “That doesn’t really seem to make sense when it comes to sales taxes,” because I didn’t really see how they could specifically and exactly tie in, so that’s some good clarification and I think something I didn’t really know that well. Of course, I don’t do an e-commerce site myself, but I think that that’s really good to know for anybody that, “Hmm, I’ll just throw in zip codes,” so thank you for that answer.
Jake Estes: Yeah. Absolutely. Yeah. Like I said, there’s overlap and a sometimes the zip code will get it correct, but often it’s not, so it’s good to be safe than sorry.
How does a merchant know which products are taxable?
Bob Dunn: Exactly. That’s probably a good thing to remember with anything with taxes, is better to be safe than sorry. As far as products, why are some products taxable and others not? How do I know whether or not to charge sales tax on a product?
Jake Estes: In the United States, all tangible personal property is taxable, so … At Avalara we just refer to it as TPP, tangible personal property. That said, some states have reduced rates or supplemental rates for some items. I believe in New York, they have an increased rate for luxury clothing, so anything that is more than a hundred and ten dollars, is taxed at a higher rate than the normal sales tax rate.
Medical devices are taxed differently. Food is taxed differently, health supplements, so it really depends on what you’re selling. There’s no yes or no answer here so, that said, when it comes to tax exempt sales, if you’re selling to a certain type of customer, let’s say a government entity, a Native American Tribe, a foreign diplomat, a non-profit, or even another business where they’re not going to be the end user, these transactions are nontaxable.
They have to tell you that as the seller. They have to tell you that they’re nontaxable and to show that they’re tax exempt and provide you with an exemption certificate for you to keep on file. The reason for this, is that if you get audited, the state will ask, “Hey, why didn’t you charge sales tax on this transaction?” and they then will ask for a valid exemption certificate, so if you want to avoid paying penalties interest, you need to have this document on file.
How are digital products taxed (downloadable music and ebooks, for example)?
Bob Dunn: Okay. This comes out of that and this is something I just thought of and you’re talking tangible products, how does downloads play into this, like downloaded music, downloaded ebooks, things like that, for sale?
Jake Estes: It depends. It depends on the state or the jurisdiction that you’re purchasing it in. I think iTunes, if you go buy a song off iTunes, most states are now considering that taxable property, so that’s why you see the extra ten cents on your $1.29 purchase, your dollar purchase.
There are electronic services like Netflix that are taxable, so even though you’re not downloading anything, the streaming service is taxable. The real crux of all this, is that it just depends. There is so much pending legislation out there, where these rules, I might say something correct today and a state changes their laws and I’m wrong tomorrow, so it’s really something that you’d want to outsource and automate if at all possible.
How does one go about keeping up with the changing tax laws?
Bob Dunn: I was just thinking that because we can be talking about something, like you said, today, but with the laws changing and … That might play into this other question I have here, more general on how to keep your sales tax collection and filings straight for your business.
I want you to give us some insights on that, but if that includes how to be informed if you’ve decided to do this all yourself (if you’re insane enough to want to actually handle it all yourself) and how can you be notified of these laws and how do you keep up on the laws, which seems like would be a huge part of keeping your sales tax collection and filings straight?
Jake Estes: Yeah. It’s a huge burden. There are some states that send out updates that say, “Hey, we’re going to start charging XYZ rate for these products.” Sometimes they’ll, if you subscribe to their website, they’ll notify of rate changes, to general rate changes, but they’re governments, so they’re not always as tech savvy and as tech forward as a lot of businesses, so that’s sort of an archaic way to do business as well.
I would recommend completely automating. Here at Avalara, the power of our engine, is that we have a content team of tax attorneys and former CPA’s and state and local tax specialists, who are monitoring all of these legislative changes so you don’t have to. If it takes us, a team of a hundred people to do it, how the heck are you going to do it as a five-person business, where you’re focusing on a ton of different things and everyone’s wearing twelve different hats? It’s very burdensome.
Are there tips for merchants who want to keep their tax collection and filing straight?
Bob Dunn: For somebody that does say, “Okay, I’m not going to do this,” they’re getting ready and they’re saying, “I’m going to have Avalara take care of this,” can you give them some tips on how to keep their sales tax collection and filing straight, so they have everything in order?
Jake Estes: Yep. Absolutely. We try to make the use of our products as simple and straightforward as possible, so evaluate where you’re at in your business, make sure that you’re actually in a position where this product makes sense for you. If you’re griping about having to deal with sales tax every month, it’s certainly worth considering to invest a product like Avalara.
We have plugins for all of the major e-commerce shopping carts, so what is this, WooCommerce, Big Commerce, Shopify, Weblead, where you can buy a subscription to Avalara services online. You don’t have to talk to anyone unless you want to, so we make it very straightforward. You just choose a plan that makes sense for your business based on how many transactions you’re doing and we’ll do the calculations for you and then, if you’d like, we can also do the filing and remitting of funds.
Some people just say, “Hey, I just want calculations. I can do the filing myself. It takes me an hour or so,” and that’s fine. We’ll give you a range of services to purchase, so there’s several options there and we’re so confident in our tax engine, that we’ll actually guarantee the calculations are accurate. We’ll guarantee on-time filing and accurate filing of your returns.
If you’ve got additional needs, software is one element of what we offer, but we help people as well, so we can help with registering in different states or individual jurisdictions. We can help you figure out where you have nexus and where you should be collecting. We can do audit defense, back-filing. We can help with streamline sales tax registration, so there’s a number of things we can help.
Bob Dunn: There you have it, the big picture. I do want to thank you Jake, for taking a little bit of time out of your crazy tax schedule and sharing this information with us.
Where can listeners find Jake?
Jake Estes: Yeah. Absolutely Bob and if folks want to reach out to Avalara, just with random questions, they’re more than welcome to chat with me. I’m happy to take some time and answer questions. You don’t have to give us anything, but we’re happy to help here, so …
Bob Dunn: Excellent. Thank you very much and for my listeners, if you are just starting an e-commerce site, or perhaps you have started one and find yourself buried in sales tax when you really need to be focusing more on your products and your store, do check out Avalara.com and see how they can take some of the weight off of your shoulders.
Join us again soon as we move deeper into sales tax with our sponsor Avalara on the WP E-Commerce Show.