Posts Tagged ‘tax liability’

The Coming Sales Tax Storm for Online TShirt Companies

Friday, July 10th, 2009

We’re all aware of the amazing success of the online custom t shirt companies. You can build your design using the online design software, collaborate with others, and place your order to get the shirts printed. Great idea and it’s worked really well so far.

There are lots of winners in this model. The consumer wins because they can participate in creating their graphics without being a graphic designer. They also win because the freight is usually free and there is no sales tax due, so they save some money over the local guy. The final cost of the shirt may or may not be cheaper than doing it locally, but the experience is a lot more fun and they don’t have to deal with the local “silkscreener.”

The online t shirt company wins because they are almost always “virtual.” They don’t do the actual production. They contract with screen printers all over the place to do the work for them. Nothing at all wrong with that.

It allows the virtual company to find suppliers in the general geographic region where the original order was placed so they can get it produced close to the consumer and keep their transportation/shipping costs as low as possible. Nothing wrong with that and it’s good for the environment.

The screen printers are a big winner. Traditionally they are not good at marketing or sales. They are tech junkies who would just as soon print and never have to deal with a customer. Since the online guys are great at marketing, the screen printers get a steady stream of orders to keep them busy. What a great deal for everybody.

But there’s trouble brewing on the horizon. With 44 of the 50 states currently in a financial deficit situation they are ALL looking for ways to increase their revenue and online transactions are one of those areas where the microscope is focused. Those of us in California are probably in the worst situation right now.

Trouble is, the State of California has figured out that even if you are a third party manufacturer or drop shipper for an out-of-state company, you are still liable to collect the sales tax on orders produced and shipped to customers in the state even though you did not originate the order AND you do not know how much the order was sold for. The State has some bogus formula they use to concoct the Sales Tax owed.

One of our companies was caught in this situation a couple of years ago. During a routine sales tax audit the relationship to a large virtual online company was “discovered.” This set off all kinds of bells and whistles and ultimately we got a tax bill plus penalties for many THOUSANDS of dollars.

Fortunately the online company involved did the stand-up thing and ponied up the tax due, even though they were not obligated to under the “presence” or “nexus” statutes. However, this is only one case and I know for a fact other vendors operating in California have NOT been informed of this potential HUGE liability.

This is an enormous potential liability for companies who are acting as outsourced manufacturing. I don’t know how many other states have statutes like this, but I would bet it is more than you might imagine. If you do work for online custom t shirt companies, do yourself a favor and check this out before you get a nasty surprise when the tax man shows up demanding crazy amounts of money. The one thing we can count on for sure is that this is only the beginning.