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 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 taxes. B2C and B2B companies would be legally required to collect these taxes according to each state’s tax rates, and standard laws, fines and penalties would apply in cases of noncompliance. States can treat cases where companies collect the 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 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 taxes, 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 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 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 regulations, exemptions and taxable items, which makes accurate manual calculations nearly impossible. For example, Texas, which has one of 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.