Washington state will require businesses to collect sales tax for items shipped to out-of-state customers beginning Monday.
The Washington state Department of Revenue announced the requirement earlier this year after a U.S. Supreme Court ruling in the case South Dakota v. Wayfair.
Online retailers Wayfair, Overstock.com and Newegg challenged a South Dakota law enacted in 2017 that required out-of-state retailers with sales exceeding $100,000 or 200 transactions annually to pay sales tax.
Government officials in South Dakota claimed they were losing $48 million to $58 million in revenue because of the e-commerce expansion as well as online businesses failing to pay sales tax. And, some businesses feared they would lose sales from customers accustomed to tax-free shopping online.
Before the Supreme Court decision, many states were prohibited from collecting tax on sales from sellers that didn’t have a physical presence in the state. Now, more than 30 states are acting to pass regulations to collect sales tax from online retailers.
The physical presence law stemmed from a 1992 Supreme Court case which found a company selling in a state must also have a physical presence to collect sales tax.
Taxes from online sales typically include local and state sales tax from the location where the items are shipped to or from which orders are filled.
In Washington, companies that have more than $100,000 in retail sales or 200 transactions now must register with the state and collect sales tax from customers.
Sellers with less than $100,000 in sales they must comply with the state’s Marketplace Fairness law, which has been in effect since Jan. 1 and requires businesses to collect sales tax or follow use tax notice and reporting requirements.
Taxable online retail and mail order sales in Washington hit $3.1 billion in 2017, according to the state Department of Revenue. Nationally, e-commerce sales totaled more than $127 billion in the second quarter of 2018, according to the U.S. Department of Commerce.
Washington state – which doesn’t collect state income tax – relies on sales tax revenue to fund social services as well as schools and parks.
The state Revenue Department has received a few phone calls from businesses requesting information about the sales tax requirement, but not a lot, department spokeswoman Anna Gill said.
Gill advises businesses to review their retail sales in other states and determine that state’s monetary limit – or threshold – and start date for tax collection. If selling on a third-party website or marketplace, businesses should determine if sales tax is collected on their behalf, she said in an email.
Under the new sales tax-collection requirement, businesses could face increased administrative compliance costs, which could mean lower profits, or they will have to pass the costs along to consumers, said John Buhl, spokesman for the Tax Foundation, an independent tax policy research organization based in Washington D.C.
Larger businesses may be able to absorb the costs, while smaller online businesses could be hit the hardest, he said.
“We found compliance costs get bigger, the smaller the business is,” Buhl said.
In the Wayfair decision, the Supreme Court didn’t address how states should handle marketplace or third-party sellers such as eBay, which could face an issue of who is responsible for collecting sales tax. They could also face difficulty making a profit on sales they help facilitate, Buhl said.
Buhl said states and brick-and-mortar stores reap the most benefits from sales tax collections. States will collect more revenue, while brick-and-mortar stores now will be on an even playing field with online retailers.
Amazon changed its business model to collect sales tax, and a majority of online retailers already collect tax as well, which means it may not be as much of a sticker shock to consumers as it would have been if implemented in the mid-2000s, he said.
“These days, maybe one out of two online purchases already has a tax collected,” Buhl said.
Spokane retailer Huppin’s TV, Audio, Cameras and More collects tax from 31 states, but will now have to collect from all 50 states as of Monday.
Because the retailer sells and ships items out-of-state via Amazon and third-party platforms, it is accustomed to collecting sales tax from customers, said Myk Crawford, Huppin’s marketing manager.
Companies such as Amazon already are collecting sales tax from customers, as are Walmart and Target, which typically have a physical presence in every state.
Crawford said the sales tax requirement has affected Huppin’s to an extent, specifically when out-of-state customers think they don’t have to pay sales tax on items.
“Every couple of months, we’ll get questions from customers wondering why they were charged sales tax,” he said.
Crawford said although companies collecting sales tax may lose an advantage over another business that’s not, it isn’t likely to affect Huppin’s much.
“People will still be buying what they want to buy. Everybody knows internet sales tax is coming. I wish it was more standardized from a management perspective,” he said, adding that tax rates can vary depending on addresses and ZIP codes. “Reporting and keeping track of that stuff is quite a challenge.”
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