How One eCommerce Seller Tried to Do the Right Thing with Sales Tax and Got Screwed

by Jennifer Dunn November 1, 2020

Many eCommerce sellers have a “breaking point” in their relationship with sales tax. It usually happens when a seller realizes how tough it is to comply with sales tax law in multiple states.

Here’s the story about one such seller and her breaking point.

Meet Gina, FBA Seller 
Gina’s name has been changed in this case study to protect the innocent and overwhelmed! She’s an ecommerce seller who started selling in late 2012. While it hasn’t been an easy road getting to the level she’s currently at, she’s managed to invent and reinvent her Fulfillment by Amazon (FBA) business in order to provide herself and her family with a second income.

“I only sell things I like or think should be offered,” Gina says. “From cute baby items to sewing and crafting products to survival kits.”

Gina sent out her first FBA shipment in November of 2012, not too long after she started her shop. After reading a great book by eCommerce pro Skip McGrath, she knew selling through Amazon would be a terrific way to expand her business. She read more about sourcing inventory and got to work. But some things weren’t so simple…

FBA and Sales Tax

“No one tells you that your inventory sitting in [an Amazon Fulfillment Center] equals collecting and remitting sales tax for items sold in that state,” Gina says. “So it was early 2014 before I knew that I needed to remit sales tax for any state besides my home state of Washington.”

Gina was reaching her breaking point. After doing more research, she found out she had nexus in 13 states with 11 of those requiring her to collect sales tax from her customers and remit sales tax returns and payments. She had been operating since 2012 with no idea this was even something she had to pay attention to.

“I don’t owe a lot but I’m a good, honest person and trying to do the correct thing. Because I don’t owe much, no one wants to work with you on what you do owe, specifically for penalties. So I started registering for sales tax permits and tried to bring myself into compliance.”

“TaxJar has been a fabulous source on where to get information and how to get started,” Gina continues. “But when you are a ‘me, myself and I times two business’, it takes time to get it all done. I found [voluntary] disclosure information for two states. One accepted my paperwork and I only owed back tax. The other denied my disclosure with really no explanation. I believe that was because I didn’t owe enough and they wanted the penalty money. “

When States Won’t Work with Sellers

Then there’s Gina’s experience with Texas. Gina found out she had sales tax nexus in the Lone Star state for five quarters. While the actual sales tax owed wasn’t a ton of money, the five quarters worth of penalties totaled $250. On top of that, the confusion caused her to misfile one of her returns and Texas asked for a payment of several thousand dollars. When she called to correct it, they demanded she finish all her back payments, first.

In 7 days.

“That’s the time I was given to file them before they would send me to collections,” Gina says. “I owed them about $130 in back taxes for that thirteen-month period but had to pay $380…so about 66 percent of what I paid was penalties.”

Gina’s gross sales in Texas for those five filing periods was about $1,700. Take out expenses and assuming a 50 percent profit margin (a high end estimate) then she was left with $850. Minus the $380 paid to Texas and now she’s left with a 30% profit margin.

Unfortunately, it gets worse: Arizona, South Carolina, and Virginia have all been just as bad. She’s been threatened with jail time and even collection agencies before she had a chance to pay. All her money is going to something she didn’t even know existed.

Now Gina is at her breaking point. The states she has nexus in have made life so difficult for her that running her business has become a nightmare. When she does try to pay, they make it as tough as possible.

Luckily, Gina has resolved to soldier on. Instead of giving in she’s fighting on and contacted us to get her story out there. But how many sellers out there just like Gina – good people with perfectly legitimate FBA businesses and no way to keep their head above water? When will states realize they’re doing more harm than good with these ridiculous, arbitrary laws?

A Tax Professional’s Viewpoint

We checked in with Lauren Stinson of Windward Tax on her advice for sellers in Gina’s sticky situation. Here’s what Lauren had to say:

“Unfortunately, as sales tax specialists, we see people facing the same problem as Gina on a regular basis.  When starting a new business, they think of the income tax ramifications of the business, but forget to consider the sales tax piece of the business.  What looks like a fairly straightforward process quickly turns into a complicated nightmare.

An important lesson to learn from Gina’s story is that with the right professional help, these problems can be avoided or at least minimized.  Once a business discovers it has nexus in a given state but has not registered or collected sales tax, it is best to get help with a Voluntary Disclosure Agreement (VDA).  With a VDA, you have a professional sales tax expert working on your behalf, keeping your business name anonymous.  They will get the business registered and negotiate tax, penalties, and interest.  It is a win-win situation for all:  the State gains a new business and collects sales tax on their behalf while the company moves forward with a clean slate.   No more worrying about past taxes, collection agencies or jail time!  The one important caveat is that once your company is registered, a VDA is no longer an option and your negotiating opportunities are over.  Timing is everything!

An important piece of advice is that sales tax should not be a DIY process as it can get very complicated quickly.   And as your business grows, the monetary risks escalate.  Seek professional help early to avoid costly mistakes associated with sales tax compliance.  Also consider solutions such as TaxJar to simplify your tax return filing.  Outsourcing the entire sales tax process may be the best choice to save you money and provide you with more time to run your business.”

What does Gina’s story have to do with you?

Not every online seller sells on FBA, of course, but if some U.S. legislators and retail lobbyists have their way, every online seller will be forced to deal with sales tax compliance in every state. Imagine Gina’s nightmare, multiplied by the forty-five states that have a sales tax, and transmitted to every online seller out there. That’s what the term “internet sales tax” implies. Small businesses would have to further struggle to comply, some would lose their livelihoods, and the whole economy would suffer.

We found Gina’s story through our Sales Tax for eCommerce Sellers Facebook group. Join us there to share your own story and get your questions answered by fellow sellers and tax pros.

Have you had sales tax compliance problems similar to Gina’s? Share your story below or Contact Us. We want to bring these stories to light to help other online sellers avoid sales tax problems down the road.Please note: This blog is for informational purposes only. Be advised that sales tax rules and laws are subject to change at any time. For specific sales tax advice regarding your business, contact a tax advisor.

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