Collecting Sales Tax with Back-End B2B Integrations
B2B companies often don't worry much about collecting sales taxes because they usually sell products for resale, so they usually aren't required to collect sales tax. There's also the global scope of eCommerce B2B sales that complicates the sales tax picture. However, things aren't that simple anymore.
The constantly changing sales tax picture, which was often ignored in the earlier days of Internet sales, has evolved into a major source of income for tax jurisdictions throughout the world. The more that online sales increase, the more aggressively tax authorities are moving to close Internet-sales loopholes and ensure sales and use tax compliance.
A Sales Tax Primer on Website Sales
The retail sale and leasing of goods are generally always taxable in every state except the five that don't have state sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, Alaska and Montana grant taxing authority to localities, so local taxes might apply. In general, B2B products sold for resale aren't taxable, but B2B equipment and products used in business are subject to applicable sales tax. In some states, sales rates can vary among cities and localities within each state.
Origin-based tax states—such as Tennessee—base their taxes on the city where products are sold, but Tennessee and most states switch to a destination-based model for out-of-state companies that sell products within the state. Called use taxes, these assessments on out-of-state internet sellers mirror the rates charged for sales taxes in the relevant states.
All these complicated taxing guidelines create an accounting and billing nightmare, which is why so many B2B companies have just ignored collecting taxes in the past because the bulk of their sales were nontaxable on resale items. However, eCommerce companies—both wholesale and retail—can expect greater compliance efforts as states crack down on this source of revenue.
Now that companies can easily integrate complex tax calculators into their B2B eCommerce platforms or accounting software, they have little excuse to plead ignorance of the law or undue hardship in calculating taxes correctly. States are beginning to step up enforcement efforts by targeting larger companies, but small-to-medium-sized businesses will quickly follow. Getting websites customized to make these tax calculations is simply sound advice and good business practice.
Origin-based sales taxes depend on whether a particular company has any kind of legal presence within the state such as a physical address, employees who work for the company, ownership of intellectual property registered in the state, and other precise legal definitions, which can actually vary slightly state-by-state.
Some states charge taxes on the sale of services while others don't, and many charge service taxes at different rates than for physical products. Other sales tax can go by different terms such as RTA tax, stadium taxes, or local tax surcharges, and many localities impose education taxes that benefit local school districts.
To Collect or Not to Collect
Many B2B companies have never collected sales tax while others collect it only if they have a physical location and business customers who regularly buy equipment, supplies, and products used in business or offices. Although companies from out-of-state can collect taxes for other states as required by law, there has been no legal mandate to do so except within the states where companies operate. That may soon change because of The Marketplace Fairness Act, which is pending in Congress in 2016.
The new law would make collecting sales taxes mandatory in the 45 states that have sales tax. B2C and B2B companies would be legally required to collect these taxes according to each state sales tax rates, and standard laws, fines, and penalties would apply in cases of noncompliance. States can treat cases where companies collect taxes but fail to forward them to the tax authorities as embezzlement.
Deciding whether B2B companies should collect taxes could take up pages without coming to any hard-and-fast conclusions. The best answer depends on what B2B companies sell, how much of their inventory is generally for resale, and how much of what they sell is strictly used in business operations. The short answer is that if a business operates within a state, then it must collect sales tax for items that aren't commonly resold. It seems likely that the Marketplace Fairness Act or some variation of it will eventually pass as states increasingly complain about tax loopholes in digital sales.
Until such time as companies are legally mandated to collect sales tax, B2B companies can choose to collect taxes or not on out-of-state orders. However, it's a good idea to prepare for the possibility, and since companies must collect taxes within the states where they operate, it's not much more difficult to customize the software to handle taxes in all the states.
Determining How Much to Collect
Determining how much tax to collect manually would be a nightmare for the staff of a busy B2B eCommerce platform that commonly sells supplies, business equipment, and items for resale in all the states. Generating B2B invoices and fulfilling orders would languish until staff could examine orders and consult tax tables, connect for updates, and determine which products fall into certain categories.
Each state has its own sales tax exemptions, tax law regulations, and taxable items, which makes accurate manual tax calculations nearly impossible. For example, Texas, which has one of the highest sales tax rates, normally taxes products at 8.25 percent but charges 66 percent of that rate for services. Every county in the state also has a different tax rate based on a local tax option, so companies would need to determine which county each customer is actually from, a daunting task when dealing with lots of Texas orders.
The problem becomes magnified when orders consist of taxable and nontaxable items, drop-shipping where items ship from different locations, some of which might be in the state and some of which might be outside its jurisdiction. Split shipping introduces an entirely different level of uncertainty when bulk orders are shipped to hundreds of separate store addresses. These orders might go to different countries, states, cities, and counties and have different product distributions that might or might not be taxable and other variables.
Custom tax-calculating APIs are available as stand-alone applications and API additions that can be integrated into B2B websites to calculate taxes accurately. B2B platform customizations might be needed to route the information where it's most needed in ERP and CRM software, add special features like ZIP code and street address lookups, and other customizations. Avalara is one of the most accurate and popular APIs because it calculates taxes precisely based on ZIP codes, verifies addresses, and checks tax rates through real-time connections with the relevant taxing authorities.
Sales Tax Collection with Rate Tables
B2B companies that have fewer taxable sales and don't want to pay a premium for a real-time API integration often opt for rate tables, which are less expensive, that plug into the API layer of order-calculating software. These can be used for years and updated with new rate tables.
However, it's likely that transactions will occasionally be off by a few pennies or dollars depending on the size of the order and the tax rate. However, since there are no fees per transaction when using this method, decision-makers feel that paying a little extra to make up for tax errors is a bargain.
Ensuring Accurate Collection of Sales Tax
There were more than 6,500 changes to sales tax rates in U.S. counties last year. It's really impractical—and impossible—to keep up with all these changes manually for multiple orders and jurisdictions, which is why states haven't pursued collections in this area in the past. States got better results auditing local, registered companies that could be taken to court and fined for noncompliance. However, integrating a real-time API to calculate taxes now makes it possible for any company to remit sales tax properly.
These integrations are so efficient that they can even file IRS returns, state taxes, and sales and use a sales tax return for a B2B eCommerce platform. Larger B2B companies and those companies that sell to businesses that have ties to government agencies are better off paying the small transaction fees to automate accurate tax calculations and foster an image of professional competence.
Business Benefits of Sales Tax Integrations and Customizations
Customers can use customized back-office integrations to research tax rates for their own needs, which makes their B2B platforms more valuable to them. Customizations can generate sales tax reports by state, county, products, and other criteria. Customers love the fast tax calculations no matter where products need to go in complex shipping strategies that involve split-shipping and drop-shipping applications. Back-office fulfillment speeds are almost instantaneous with real-time sales tax calculations and automatic designations of taxable and nontaxable products.
Customized features can also manage the administrative duties associated with sales tax collection such as connecting automatically with sales tax offices, preparing returns, forwarding taxes electronically, remit sales tax with a state, and managing documentation such as customer resale certificates issued by the state, which should be updated each year but often are never collected, updated or kept on file.
International Taxes Like VAT
B2B sales in the European Union are tremendously common for U.S. eCommerce companies, and EU members use Value Added Tax or VAT, which is added to the price of goods and services. The laws for paying these taxes on digital sales to Europe have been in place since 2003, but new regulations have changed the picture and might require a B2B company to collect VAT. Although VAT is collected throughout the EU, the tax rates have ranged from 1 percent to 27 percent. Before 2015, companies could sell through a Luxembourg exchange and only charge a minimum of 1 percent. In 2015, companies must charge the rate that applies to each delivery address.
Of course, most B2B companies aren't affected if they only sell goods for resale. However, products used in business operations and as gifts or incentives are subject to VAT. Companies doing business in the EU face the unusual complication of adding VAT to product prices and forwarding the taxes to the appropriate tax authority. There are minimum sales thresholds and exemptions for food and children's clothing, but these seldom apply to B2B companies. Other countries have similar tax situations and customs and duties that must be calculated, collected, and forwarded.
B2B customizations can manage these tax calculations effortlessly by connecting with the appropriate tax information through the API layer, getting the latest information, applying the taxes, making entries in accounting software, and generating reports. Even companies that don't currently sell in Europe might expand into this lucrative market, so getting the technology in place during platform development could make expansion a more attractive option. It's always important to build a platform that can grow and adapt.
Charge Sales Tax with These Tips
The world is rapidly becoming a single marketplace, and getting your B2B website ready to sell anywhere and anytime makes a sound financial strategy. At Clarity Ventures, we can develop customizations that make national and global B2B sales as simple as selling products from a neighborhood store.
During the implementation process, we can install intuitive systems like Avalara that can provide real-time address verifications, determine sales tax rates by ZIP codes and ensure that your business is always in compliance to remit sales tax. We also understand how valuable these tools can be for speeding up order fulfillment, making accurate tax calculations, and forwarding the information to inventory and accounting.
Call or contact us today to find out more about back-office sales tax integrations or request a custom price quote based on your B2B eCommerce development needs.