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How Your Business Might Be Affected by California’s New Sales Tax Regulations

On the eve of new sales tax legislation in California, we decided to ask Avalara about how e-commerce business owners are affected by these changes. In this interview, we’ll explore:

  1. State and Federal internet sales tax
  2. The complexity of sales tax compliance across multiple states
  3. How Avalara’s built-in tax automation can save you time and money

Recently, California passed a law that requires online retailers with in-state affiliates to collect and file state sales tax on purchases made by California customers. This new law says that if an online retailer has a physical “nexus” in the state (for example a distribution center or corporate subsidiary), they must collect sales tax.

Our very own Jon Humberstone recently interviewed the team from Avalara to bring you the latest information about state regulations for collecting sales tax and how merchants can avoid headaches by enlisting their help.

JON:  Although California is not the only state to try to change sales tax law, it seems a little more aggressive.  It’s more credible that a state like California would push something through.

AVALARA:  Absolutely. A Federal decision on internet sales tax may be years away but states don’t want to wait.  They want their tax cut now.

JON: California has hired auditors so they must not be thinking that we’ll have to wait 3 years or need to go through Federal court to start collecting tax money owed.

AVALARA:  That’s correct. California is concerned not only with the internet tax, but also the tax gap, which is the difference between what’s actually collected and what’s actually owed. Companies are not always aware of all the changes that affect product taxability.   However, these changes directly affect how much they should be collecting.  So we have a tax gap.  Unfortunately, the state puts the responsibility on the customer to make up the difference. The state’s feedback is always going to be, if you are doing business in our state, it’s a benefit to you. And if we make changes it’s your responsibility to know about them.  Unfortunately, merchants sometimes rely on data that are inaccurate, incorrect, or outdated.  It’s difficult.

JON: Even if you have a corporate accountant. For a lone corporate accountant out there it would be virtually impossible to keep up with all that, and why would they, if there is someone else out there like you that that’s their full time job.

AVALARA:  Accountants and CPAs are not sales tax experts. My CPA tells me that all the time.  He refers customers to us.  He’s very good at doing my income tax, setting up a trust, helping companies balance general ledgers but he’s not good with sales tax.  He doesn’t know about compliance.

Sales tax compliance is extremely challenging because of all the complexity.  With 11,000 taxing restrictions, thousands of product and service taxability rules, and all the exceptions, maintaining accuracy is extremely challenging.

JON: We are seeing a trend.  More of our merchants are picking up product feeds from distributors so that they can access catalogs of 20-30-thousand products because they want to have access to these distributors.  These merchants think they are doing well if they can track their own web statistics, not to mention the bigger task of tracking tax liability for twenty thousand products.

I understand that California is not the only place where these kinds of laws exist.  In which other states do they already exist? And are these internet sales tax laws enforced or not?

AVALARA:  A lot of the states have targeted the sales tax issue just by expanding their definition of physical presence or nexus, which then triggers the requirement for companies to collect and remit sales tax for that particular state.  This effort is really targeted at the internet web community because that’s what merchants do, they leverage affiliates to drive traffic to their sites so people buy product from them.

Other states approach the issue differently from California.  These states have imposed a requirement specific to the amount of in-state revenue generated. Colorado created a rule that states: if you do over 100k per year in our state, you need to provide us a list of all the consumers that purchased from you.  In this case, Colorado is imposing a use tax. If you, the consumer, purchase something, you should be declaring use tax.   Policies vary state by state.  Most states legislatures are listening to what California is doing and looking at what options they have to solve the challenge…

JON:  Now, I read something a while back that seems to me to have impact on just this very thing – Amazon’s decision to stop fighting some of those tax regulations and affiliate tax regulations in some states. So if they stop, our retailers of course don’t have any chance of fighting those regulations. Retailers might have felt some confidence in taking a risk and not tracking these kinds of taxes because they knew that Amazon was fighting and they’re a big behemoth, and they might win. But now they are not fighting anymore.

AVALARA:  They have pretty much capitulated…  The smaller companies are not going to fight the state of California. They are going to have a tough time.  That’s what a lot of companies are looking at… At Avalara, we help them understand their requirements and make suggestions, but we don’t tell them what they should do or not do there. That’s ultimately a business decision and a compliance decision but they are becoming much more conservative. And Amazon is obviously taking a very similar approach here.

JON:  Right. So if we get back to our user base, they might be asking themselves, “Ok, well which of all these things apply to me – or specifically this new California business, does it affect me or not, how do I know?”

AVALARA:  I think there are a couple of things. You want to be aware of the changes that states are making throughout the US. It’s not always the easiest thing to do.  The recent California rule is something you want to be aware of obviously especially if you are doing a high dollar volume of business there – over a million dollars or over 10K through affiliates, you need to know about that.

For the small-midsize business community, really today, continue to focus on nexus, physical presence, that’s the most important thing. You need to focus on how you are conducting business, and is it triggering a physical presence in any state or jurisdiction.  What we hear from companies is, “I conduct training in certain states. I attend trade shows and have travelling sales people soliciting business.” Physical presence is not just having employees or a building or a warehouse, and that’s where companies fall off a little bit. So our recommendation to small and midsized business is that if you are working with affiliates, if you have travelling sales people, if you are conducting business in a way that you have some concerns, have a third party firm do some research for you at a state-by state level. Make sure you are compliant and collecting where you should be. That’s really important…

JON:  So is that what you at Avalara do? Some kind of analysis of what their nexus exposure is?

AVALARA:  Absolutely.  We’ll do it nationwide or on a state-by-state level, so it makes it cost effective for them.

JON:  Great! I noticed somewhere in your material about calling for a free consultation. How does that overlap with what we are talking about?

AVALARA:  For the first initial consultation is just an overview of the business, what are the products/services they sell, how they conduct business, and asking all the appropriate questions around the business model and what they are currently doing for compliance around what states they are collecting in and where they are filing and all that information. We ask the company if there are any concerns that they have, but we may also flag some of those issues up front where you know if a company is renting equipment in California but they are not charging tax on it. We’ll say, “Hey, you know it triggers nexus in California you probably want to get this reviewed and come up with a plan to address this.”

So this initial call is helping us to determine do they need to dig deeper into this and if they do, we have one of our compliance team members on a follow-up session walk through the requirements and then make a recommendation whether they do a nexus study, or whether they are fine and can continue to do business as is.

But the initial work is all free as far as helping them understand their exposure, then if they want to use us for research, that’s a paid service.

JON:  So is there anything else our merchants should know about, think about, learn about…

What if our retailers are already using some other kind of service that includes a zip code tables or they’ve built some or downloaded something that works, that’s not enough in this case?

AVALARA:  … You know zip code based tables are going to be inaccurate in many states because of the way jurisdictions break out.  Zip codes have nothing to do with state taxing jurisdictions. They are put in place by the Federal government to deliver mail. What is the benefit of accuracy to you?  Some companies figure they are accurate enough. Some companies want to be as accurate as possible to be bullet proof, if they are ever audited.  … Zip code based tax tables have no taxability logic. They need a solution that supports taxability by product.

On the reporting side, you are required to break it out by state, county and city special taxing jurisdictions… If you don’t report correctly, it can flag you potentially for an audit…

JON:  …it seems like a full-time job, being audited.

AVALARA:  We hear from companies all the time that it takes 2 to 3 weeks to prepare and that the auditor was in there for a week as well.  So it can take a lot of resource time to prepare. And money!  It ends up on average $48,000 is the cost of an audit…

One thing we hear is velocity of changes that occur to rate rule and boundary information is ongoing and it is impossible to stay up to date. That is one thing for your customers, whatever solution they have been using, they need to make sure they have a solution that is tracking monthly updates and is up to date supporting the transactions within the environment.  It’s not a hundred changes a year, it’s in the thousands. We processed over 6000 changes last year.

Read More on This Topic
Amazon Tax:  California Residents to Start Paying Sales Tax from the Huffington Post

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