Fast-Acting State Revenue Agencies Among Holiday Retail Winners
As retailers count their holiday receipts, clear victors are emerging.
However, it’s not just retailers counting their revenue; so too are those states that acted quickly following the Supreme Court’s South Dakota v. Wayfair decision last June and enacted rules compelling e-commerce sellers to collect and remit sales tax in their states. The Wayfair ruling, in overturning years of precedent, immediately opened the doors for states to require out-of-state online retailers to collect taxes directly from customers, and those states that moved quickly found themselves poised to reap the tax revenue rewards this past holiday season.
However, the opportunity for other states to join in is by no means lost. With California now poised to tax remote commerce starting April 1, it seems more likely that by this time next year, every state with sales tax will have a remote seller collection law. Online retailers that haven’t done so already need to account for the impact of these new rules on their businesses — and fast.
Riding the Regulatory Wave
Past rulings by the Supreme Court maintained that retailers were only required to collect sales taxes if they had a physical presence — i.e., people or property — in the state. The Wayfair ruling changed all that. Under the new “economic nexus” standard, states are allowed to redefine the tax obligations of remote or online retailers. Many already have acted to change their rules, and those that haven’t are taking notice.
Following South Dakota’s lead, 31 states adopted rules requiring remote retailers to collect online sales taxes, with six states having gone live with their mandates on Jan. 1, 2019.
Average combined state and local sales tax rates hover at around 8 percent, but in the highest taxing jurisdictions, rates regularly top 9 percent and can even creep into double digits. All this means online retailers now have to collect and remit millions more in tax from customers each year.
How Retailers Can Remain Compliant
These new economic nexus rules don’t affect every retailer — just most. Many states have adopted carve outs for small sellers with less than $100,000 in statewide sales or fewer than 200 transactions in the prior or current year. However, be forewarned: determining inside or outside these thresholds isn’t as easy as you think.
For example, does an invoice with multiple line items count as one transaction or many? Should sales to exempt customers count toward the sales threshold? What about sales for resale? Answers to these questions may fluctuate depending on the state, creating a daunting tracking exercise for e-commerce retailers. Some may simply opt to register and start collecting rather than worry about getting it wrong. After all, audit risk and the accompanying penalties can be steep.
While the Wayfair ruling has been on the books for more than six months, and more than half the country has switched to an economic nexus standard, many e-commerce retailers have continued with a wait-and-see approach, possibly holding out hope that the exiting U.S. Congress would enact a law giving sellers a chance to stop and take a breath. That hasn't happened.
E-commerce retailers large and small need to take the time to implement a tax strategy that accounts for these new compliance challenges. The tax landscape may have changed, but there are ways to keep up.
In its decision, the Supreme Court noted tax compliance software is available for any organization affected by these new rules. Automated sales tax compliance software can limit the burden on retailers by readily determining (in real time) the appropriate rate and taxability rule applicable to sales made anywhere in the United States. Comprehensive software applications can also set sellers up for accurate reporting and remittance. With the right solutions in place, retailers can rest easy in case of an audit, knowing they did what they needed to do to meet their compliance requirements.
In this new online tax landscape, consumers may be paying more at checkout, but it’s the retailers that will pay the price if they don’t pay attention.
Charles Maniace is the director of regulatory analysis at Sovos, a global provider of software that safeguards businesses from the burden and risk of modern tax.
Charles Maniace is the director of regulatory analysis at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos customers continually compliant. Over his 15-year career in tax and regulatory automation, Chuck has provided analysis to the WSJ, NBC, Bloomberg and more.