There is a lot of confusion about why RunSignup has built a major sales tax system for our customers, or why RunSignup is collecting sales tax on behalf of our customers in the growing number of states with marketplace laws.
The answer is simple – liability. Liability for race organizations (both for profit and nonprofit), as well as for registration companies like RunSignup. We estimate that across all races in the US, the race organizations should be paying over $10 Million in sales tax annually.
We released the system to 49 states last Monday. We are collecting sales tax in 35 states that have marketplace laws requiring us to do this, with more coming online on January 1 and later next year. Below you will see we collected over $41,000 in the first few days. That was out of about $4,500,000 in transactions for an effective overall tax rate of 0.91%. We expect that if taxes were collected appropriately for all states the effective rate, including exemptions for nonprofits, would be over 1%.
Race Organization Liability
Any organization that sells things is potentially liable for sales tax depending on the state laws and what they are selling. (See our taxability matrix to see if your event, merchandise, or membership fees are taxable). As the above early analysis shows, race organizations owe approximately $10 Million on the approximate $1 Billion in race fees and add-on merchandise they sell each year.
Of course it depends on where you are: in a state like Utah, where race fees are taxed at about 6.35%, the liability would be more, whereas it would be less in Delaware since that state does not charge sales tax.
Some people have told us their state will never find them to collect any sales tax, or they don’t think it is fair. BUT, there are two reasons to care:
- As states look for more revenue, they have started coming after race organizations. Some of our customers have been audited and are paying tens of thousands of dollars in back taxes.
- Your organization has officers and a board who have a fiduciary responsibility to protect the organization and themselves against potential liabilities. In some cases, the organization structure can hold them personally responsible for unpaid back taxes. Most officers do not want that level of organizational, much less personal, exposure relying on the hope that the state never finds them.
Registration Company Liability
While many registration companies are trying to build a sales tax system, there are some that are ignoring the issue. In fact, some are suggesting that they aren’t liable and it is up to the race to decide how to collect sales tax (we see this in the ticketing and even large e-commerce side). It may be true that if a state can not collect from a registration company, they still can go after the race for that tax liability. However, marketplace laws are very clear – states will still audit the registration and hold the registration company liable.
RunSignup is an employee owned company. That means we (the people) would owe that back tax. While we may be able to collect some of that from the races who are ultimately liable, it would be a really difficult situation. Especially if we waited another year to put this system out. Even investor backed companies should care – investors are picky about losing money :-).
Based on collecting over $40,000 in the first week 6 and a half days of transactions, we expect to collect and remit on behalf of races more than $3,000,000 dollars in 2020. This is because many states transitioned to become marketplace states during 2019 and early 2020. The longer a race and a registration company delay, the larger the potential liability.
The other interesting thing to note is that when RunSignup files in a marketplace state, we report all sales tax under our Tax ID. This means that races are not exposed to any reporting requirements. If a race is audited, they can simply present the reports that show what RunSignup paid on their behalf. Remember – the sales tax laws have not changed – races have owed over $10 Million annually for years. RunSignup does not solve that back tax liability.
Whether you are a race organization or registration company, sales tax and marketplace laws are real. There is an obligation both legally and financially to comply. We are all in this together, which is why we have published as much information as we can to help both races and other registration companies.