It’s been nearly two years since Wayfair v. South Dakota, a landmark case that completely changed the rules of sales tax for online companies. 

The Supreme Court ruled that states can force internet retailers to collect sales taxes in states where they have no physical presence. Led by South Dakota, states argued that they’re missing out on tens of billions of dollars in annual revenue – $13.7 billion in 2017, according to a Government Accountability Office audit. In addition, brick-and-mortar businesses have claimed it’s an uneven playing field because they have to charge sales taxes while many of their online competitors do not. The Trump administration had sided with the states, saying a virtual presence in the state is equivalent to a physical one.

Bradley Scott, whose wife is the president of their family-owned wholesale jewelry company Halstead Beads in Prescott, AZ, explains the issues his company has faced by collecting online sales tax, his recommendations to the government on fixing the process and how other business owners can get involved.

The decision has created a major administrative challenge within the promotional products industry. Companies potentially have to know the sales tax laws of every state, file sales tax forms for every state and be registered to do business in every state. It’s such a tremendous burden that companies have been forced to hire outside services or additional staff just to comply with the various sales tax laws.

“Sales tax was largely underdiscussed in our industry last year because the world’s eyes were on tariffs,” said Alyssa Mertes, lead copywriter at Top 40 distributor Quality Logo Products (asi/302967). Last June, Mertes wrote a guest column for Counselor on the industry’s perpetual struggle with properly displaying sales tax on websites.

“The law is here to stay,” Mertes said. “Forty-three states and the District of Columbia have marched on enacting new sales tax laws. More to come, which means distributors really better start taking action now to make sure they’re meeting requirements.”

In 2019, Quality Logo Products collected more than $1.4 million in sales tax, filed over 450 individual state sales tax returns and collected a little over 10,000 exemption certificates, Mertes said. According to the company’s sales and accounting managers, it’s been a headache managing exemptions and keeping things as crystal clear for customers as possible.

“Knowing what documentation you need to maintain for which states is a major challenge, especially if the distributor has you ship to their customers in numerous states,” Mertes said. “As we have learned, another challenge is to determine whether the product itself is taxable or exempt and in which states. And then because our suppliers drop ship, you also have to study the freight, handling and/or delivery charges as they may also be taxable depending on the state.”

Large distributors, particularly those in the Top 40, rely upon third-party software systems, such as Avalara and TaxJar, that provide tax compliance tools for e-commerce companies. These systems take away the hassle, but come with a hefty price tag. Their sales teams offer plans based on your needs and potential transactions per month, which can cost tens of thousands of dollars per year. “It makes business more costly, and if I were king for a day, I’d do it a different way,” said Craig Nadel, president of Top 40 distributor Jack Nadel International (JNI, asi/279600). “While it is a few extra hoops to jump through, it isn’t horrible.”

Jo Ann Gilley, CEO of Top 40 distributor Overture Promotions (asi/288473), has no complaints with Avalara. “It’s all going seamlessly well, both the invoicing and the state-by-state reporting,” she said.

Nashville, TN-based Something Inked, which has established relationships with big-name clients in the sports world, uses Shopify as the platform for all its e-commerce stores, including the ones through Amazon. Sales tax is calculated and collected through the stores; Something Inked just sets the rate based on the state/zip code. The money is then auto-charged, collected and deposited into the client’s account. “Essentially, we give the money to the client and they handle the payment to the state agency’s where required,” said Bill Feldberg, executive vice president of business development at Something Inked. “We just build it into the site setup now, so it’s pretty easy for us.” 

ASI offers sales tax functionality in ESP CRM & Orders, where distributors can elect to use a service ASI integrates with, or they can set up their own tax rates. These taxes are then used on any order created in ESP Orders.

Despite the headlines in 2018, and all the confusion and rigmarole since then, collecting state sales tax has always been required. If a distributor wasn’t collecting sales tax, then the buyer had the legal obligation to pay “use tax” on any out-of-state purchases. Most buyers weren’t abiding by the law, so it changed. “The biggest fallacy is that sales tax doesn’t exist when something crosses state lines,” said Mike Wolfe, president of Top 40 distributor Zorch (asi/366078) and a former certified public accountant. “It’s always owed – it’s just a matter of which party is responsible for it.”

With the growth in online sales, the volume of uncollected tax had grown to a point that the system needed to be changed, said Gregg Emmer, vice president and chief marketing officer of Top 40 distributor Kaeser & Blair. (asi/238600). “While some distributors saw ‘no sales tax’ for out-of-state customers as a selling point, they were really helping their customers circumvent tax laws,” Emmer said. “We never participated in that activity. Most of the largest online sales operations welcomed the change. Managing the collection of sales tax is as simple as using the appropriate software program.”

Of course, not every distributor can afford such programs. For example, Bill Wales, owner of Connecticut-based New Resources Group (asi/282431), is a small-business owner with only three employees. He refuses to spend $12,000 a year to streamline his operations. “It’s criminal what they’re doing,” Wales said. “I don’t have a problem collecting taxes if it’s easy, but the information is not easy to come by.”

Rick Hodges, president and CEO of Hodges Badge Co. (asi/225587) and Image Award Ribbons (asi/62195) in Portsmouth, RI, estimated that his companies have spent in excess of $150,000 last year collecting and remitting about $70,000 in tax. The companies use TaxJar, which is less expensive than Avalara, but still a significant added expense. “We’ve probably opened ourselves up to file income tax in each state we’re collecting tax,” Hodges said. “Whereas we used to file for two states, now we’re possibly at 28.”

Distributors aren’t the only ones who have been affected by Wayfair v. South Dakota. The sales tax responsibility can affect each part of the supply chain. Typically, suppliers have had no sales tax liability because distributors would furnish an exemption certificate saying they are reselling product. However, if distributors aren’t getting registered in the states they do significant business in and can’t provide a certificate to suppliers to exempt them, then the supplier is on the hook for the sales tax.

“We’ve been struggling to get tax exemption certificates back from many distributors because I don’t think all distributors understand these new laws,” said RaNell Lefler, chief financial officer at Top 40 supplier SnugZ USA (asi/88060).

On its website, SnugZ USA has informed customers that starting Jan. 1, 2020, the company began matching the shipping address of an order against the resale certificates it has on file. If the “ship to state” has sales tax and SnugZ doesn’t have a resale certificate or verification that a customer is under the required registration threshold, the order will go on hold until that information is provided. SnugZ encourages distributors to fill out a multi-state form and provide all certificates as soon as possible to keep orders flowing smoothly.

Many distributors are being forced to eat the cost of the sales tax passed on by suppliers because they don’t have a resellers certificate for every state they do business in. Getting that certificate for every state is tedious and can put you at a disadvantage when competing with other companies choosing not to comply with the tax law altogether.

“As an e-commerce distributor, it is challenging to know when to collect tax in states in which we have no nexus,” said Chance Castellucio, executive vice president of sales at Utah-based PromoLeaf (asi/300534). “Depending on which supplier that you deal with, they may have five to seven states that they will charge you tax in. Shipping an order to Tennessee using supplier A may have no tax, but shipping to Tennessee with supplier B will incur a tax. I sometimes call the credit/accounting departments for suppliers to ask them, and it seems like they are not sure either.”

Castellucio said PromoLeaf is planning to tackle all taxation issues with custom-built software that manages company operations, which will likely include data integration with TaxJar or Avalara.

Meanwhile, Linda Neumann isn’t sure how to handle these new sales tax issues. The president of San Diego-based Brilliant Marketing Ideas (asi/146083) works with 3,500 suppliers and customers around the country, as well as drop shipping based on a client’s need. Some suppliers are charging her sales tax based on her cost, Neumann said, which she can’t directly pass onto customers because it’s the wrong amount based on their invoice. 

“I can’t give a resale for those states because I don’t sell enough in the states for them to set me up to pay the tax,” Neumann said. “So, I have to pay the tax the supplier charges and take it as a loss. This is a problem because not only has the supplier collected sales tax for my purchase, but my client pays use tax on the same purchase. The tax authority is collecting additional sales tax, and no one can recoup that amount.”

Neumann has been dealing with this issue since November 2017, when Top 40 supplier Hit Promotional Products (asi/61125) informed customers that the company would start charging sales tax for Florida, Arizona, California, New Jersey, Ohio, Tennessee and Texas due to recent audits. Because Hit has a nexus in these states, the company must obtain a resale certificate and sales tax number from the distributor for all shipments going into these states, regardless of where the distributor is located. If Hit can’t obtain a resale certificate for these states, the company is then legally required to impose sales tax and in turn remit it to the applicable state.

Neumann has been searching for answers and relief at every turn. She reached out to lobbyists, attended a webinar co-hosted by Streamlined Sales Tax and Avalara and even aired her grievances with the deputy district attorney of San Diego County.

“Even if I get resale certificates, I’ll have to do a bunch of different reports based on all the states we sell to,” Neumann said. “It’s not as big a deal for large distributors. The only answer to help distributors is if the supplier would apply sales tax based on our invoice to the customer. That way we can hide it in shipping or increase the price. But I understand why they don’t do that because their books won’t balance. It would be an accounting nightmare, but it’s our only way to not take a loss.”