Sales Tax and CMS
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Introduction to Taxing and Nexus
Traditionally how and where you collected sales tax was pretty straightforward. If you had a physical presence in a state, this established a sales tax nexus, meaning your sales were taxable. For those states, you’d enter the corresponding rates into CMS, including the county and city rates where applicable. As e-commerce rose in prominence, however, the traditional rules for physical nexus became insufficient and started to change to suit new business models. Your nexus could now also be affected by some of the following:
- Where you are dropshipping from (including Fulfillment by Amazon - FBA)
- Affiliate relationships
- Number of days spent in a state for tradeshows/selling
- New economic nexus rules for sales into a state
Economic Nexus
With the 2018 South Dakota vs Wayfair ruling, you can now also establish something called “economic nexus” merely by the amount of business you do with customers in that state. It’s important to note that this new economic nexus for tax responsibility is in addition to the aforementioned qualifications for nexus.
In an effort to protect small sellers from undue tax reporting burdens (think eBay) South Dakota established a threshold of 200 transactions or $100,000 in sales to customers in their state to establish this economic nexus. They’ve established Oct 1, 2018 as the effective date for this economic nexus rule.
Other states, waiting on the Wayfair decision, were poised to follow suit. Some have even set an aggressive start date of July 1, 2018 including VT, KY, and HI. So far it appears states will not be able to collect taxes retroactively for earlier dates. States with similar laws to South Dakota: AL, CT, GA, IA, IL, IN, LA, MA, ME, MS, ND, OH, PA, RI, SC, TN, WA, and WY with different effective dates and financial triggers. Avalara has an excellent resource explaining each of the state’s current position on economic nexus in this article.
Determining Your Nexus
When assessing transactional volume in a given state, you'll have to look to the state to understand not only the volume but also the dates they are concerned with. For example, VT considers economic nexus established if you met their thresholds in any previous 12 month period. HI and KY, however, are only looking at the current or previous calendar year.
Also, it’s worth pointing out that for some states all sales are being considered when establishing economic nexus. This includes non-taxable sales including tax-exempt products and customers, even if for resale.
To help with your determination of economic nexus, we have developed a new report called the State Tax Nexus Summary report that will show you sales dollars and the number of transactions per state for a selected range of dates. This report will soon be in CMS but, in the interim, is available via our Support Downloads site. Note that this is not an accounting report and should only be used for the determination of Nexus due to the methods it needs to use to determine shipping charges per recipient (data that is not explicitly stored in CMS).
Once you’ve determined that you must collect tax for a given you must then register with that state, which for most states is free but can cost up to $100. It may be helpful to use this report in conjunction with a resource from Avalara which will help you understand each state's requirements.
It seems unlikely that we will see a simplification or unification of these taxes any time soon. We’ll need to contend with each state and their unique rules, rates, and compliance reporting.
The Tax Challenge
As you move from collecting tax for a state or two to having to collect tax for multiple states, the effort required to do this can become daunting. Trying to stay on top of changing tax rates and tax laws can be challenging enough. Even with that done, you'll then need to file your tax compliance reports to pay those taxes on a regular basis possibly monthly or quarterly.
Like PCI, this is not something small business was looking forward to. A lot of compliance effort without a lot of ROI but it is something we'll need to contend with. The last thing you want are tax audits and having to pay back taxes, especially for orders you never collected taxes on. For many of our clients, it is time to find a better tax solution.
CMS Tax Compliance Module
We’ve all known or feared that this day would come where we’d need to collect taxes for the majority of states. To address and simplify the increasingly complex nature of taxation and reporting we looked to partner and integrate with a third-party tax solution that specialized in servicing these needs. We originally partnered with a company called Exactor (recently purchased by Intuit to be their dedicated tax solution for their applications) and then subsequently with Avalara and their well-known AvaTax solution.
To work with these services we've developed the *Tax Compliance Module* for CMS. This module currently works with both Exactor (now defunct) and Avalara (Avatax) allowing you to get current accurate tax rates with a single click in Order Entry (and Returns) without having to set up and maintain any tax tables in CMS.
Perhaps more importantly, these companies also provide tax filing services for you. It may be hard to imagine the overhead for your business having to do the filings for each state yourself. Not only will you have peace of mind that the returns and payments are filed on time and are accurate, you’ll also reduce your exposure to audits. CMS has a "Commits" feature that allows you to submit all shipped invoices for a range of dates to Avalara to facilitate their sales tax filing on your behalf.
These services also provide tools to help you manage exemption certificates/documentation for your tax-exempt clients to ensure the exemption documents are stored and appropriately considered for transactions in applicable date ranges.
Current limitations
This beta module for CMS has a couple of known limitations that you should be aware of:
- Multiships - CMS is somewhat unique in its handling of multiple recipients (e.g. gift orders) orders as a single order. This gets complicated from a tax perspective when considering how to distribute shipping charges (some states charge tax on shipping). This is something we’re working on a solution for.
- We are currently not passing COD, Insurance, or Service charges to the tax service. These are not used much so they were left out of the initial module design in the interest of getting the module to market quickly. Let us know if these are a concern for you.
