How selling through multiple channels can impact sales tax obligations
- Oct 5, 2020 | Gail Cole
There are good reasons to focus on one sales channel, but better reasons to sell through multiple channels. Retailers able to reach consumers where they’re most comfortable are better equipped to foster brand awareness and loyalty. Those that allow consumers to seamlessly browse by phones or social media platforms will get more eyes on their products. And the more places a person can click “buy,” the more often “buy” will be clicked.
During a normal year, a brick-and-mortar store may get enough foot traffic to pay the rent and then some. But as we all know, 2020 is not a normal year. Within weeks or months of watching the ball drop, nonessential businesses in many parts of the country and world were forced to shutter or operate under severely restricted circumstances. The number of feet crossing the threshold of even the most heavily visited stores dwindled alarmingly or stopped altogether.
Foot traffic will bounce back; it already has in some parts of the world. But the pandemic has highlighted the limitations of physical stores. Survival for many retailers now hinges on ecommerce and making the most of the opportunities the internet provides.
Different sales channels appeal to different consumers
Different ecommerce channels speak to different demographics: baby boomers tend to be most comfortable shopping from branded online stores, while younger consumers (Generation Z and millennials) are more likely to shop on social channels like Instagram and Snapchat. The sandwich generation, Gen X, spreads its dollars across all channels: Amazon, eBay, physical stores, and various social media platforms.
Each channel brings unique opportunities. Influencers can promote products on social media platforms, where their opinions can be validated by peer reviews. Branded stores cultivate familiarity; they can identify repeat customers and serve them products most suited to their tastes. Marketplaces enable easy comparisons and may provide the speediest, most reliable delivery.
Selling across multiple channels allows retailers to reach consumers where they’re most likely to buy. But it also brings unique challenges when it comes to sales tax compliance.
The more you sell in a state, the more likely you are to develop sales tax nexus — an obligation to collect sales tax. Most states now require out-of-state businesses to register with the state tax department then collect and remit sales tax once their sales into the state reach a certain threshold (the economic nexus threshold).
Unfortunately, each state’s economic nexus threshold is unique. For example:
- California’s threshold is $500,000 in sales of tangible personal property
- The threshold in Illinois is $100,000 in sales or 200 transactions of taxable or exempt tangible personal property (excluding sales for resale)
- New York’s threshold is $500,000 in sales and 100 transactions of tangible personal property
Some states include services, some include exempt sales, and so on. As soon as you have customers in a state, you need to start tracking your sales into that state to ensure you’ll know to register should your sales meet the economic nexus threshold. Once you establish economic nexus, you’re obligated to register, collect and remit sales tax as required by law, and file returns on time.
Most states also have marketplace facilitator laws requiring marketplaces to collect and remit sales tax on behalf of third-party sellers.
This is a double-edged sword. While marketplace facilitator laws may relieve marketplace sellers of the grind of collection and remittance, they don’t necessarily relieve sellers of their obligation to file returns: Some states require all marketplace sellers to register and file, even those with no physical presence in the state.
Some states include marketplace sales in the economic nexus threshold; in other states, retailers should only include direct sales when calculating whether the threshold has been met. So, while selling through marketplaces can help you broaden your reach, it also complicates sales tax compliance.
Manage sales tax across all channels and systems
Success in retail relies on being adaptable and responding to changing circumstances. The same is true for successful management of sales tax.
For retailers selling across multiple channels, handling sales tax manually can quickly become an unsustainable burden. Aggregating sales data from multiple systems and marketplaces to get an accurate picture of your sales tax obligations can be a nightmare. A better option is to use an automated sales tax solution that can consolidate sales information from all your sales channels.
Learn more about optimizing sales tax compliance in tax compliance for ecommerce sellers.