It’s been a little more than two years since the Supreme Court of the United States issued its decision on South Dakota v. Wayfair, Inc. (June 21, 2018), granting states the authority to tax remote sales. Within days of the Wayfair decision, Hawaii, Maine, and Vermont began enforcing economic nexus laws that had been waiting in the wings. Other states quickly followed suit, and today, 43 of the 45 states that have a general sales tax (plus Washington, D.C.) have economic nexus, while Florida and Missouri are working on adopting it. While states have been quick to adopt economic nexus laws, a recent survey of U.S. businesses from Avalara found that many retailers still remain unaware of the Wayfair ruling or its possible impact on their business.
The goal of Avalara’s survey was to gauge the impact of the Wayfair Supreme Court decision on attitudes and behaviors related to selling activities, as well as understand specific challenges introduced by the ruling. The survey also aimed to measure perceptions and differences across companies of different sizes and monitor results over time. Respondents for the survey ranged in size, including extremely small businesses (ESB), small to midsized businesses (SMB), and medium and large enterprises (UMM/ENT). Data was gathered from approximately 250 different respondents in three separate waves (for a total of 750+/- respondents) from December 2019 to April 2020.
Survey Findings and Implications
In the two-plus years since the Supreme Court decision, awareness of Wayfair-related laws still lags among businesses, while the majority of businesses acknowledge some form of impact from the laws. Among the key findings of the survey include:
- Just over half of businesses were aware of Wayfair-related laws.
- About 60 percent of businesses noted that the Wayfair decision and resulting laws have had an impact on their business, with 45 percent of respondents citing registering to collect sales tax as the biggest impact.
- When asked about compliance, between 45 percent and 53 percent of businesses claim to have implemented all the changes needed to comply with Wayfair-related laws.
The key takeaways from the survey range from how business size impacts the level of awareness of the Wayfair decision, how businesses are impacted by the resulting laws, level of compliance to Wayfair laws, and the tools businesses are using to manage tax compliance.
Extremely Small Businesses Lack Awareness, See Greatest Impact
One key takeaway from the survey is that size matters. Over time, Wayfair-related laws are having a greater impact on ESBs. In December 2019, 44 percent of respondents representing ESBs said tax-related laws resulting from Wayfair impacted their business. By March 2020, that number had jumped to 69 percent. During the same period, the impact of Wayfair-related laws on the more-aware SMB and MM/ENT sectors decreased.
Furthermore, ESBs had the lowest awareness of Wayfair-related laws. Not knowing about Wayfair or resulting economic nexus laws could lead to a lack of compliance in one or more states, and thus create a greater impact if new obligations are discovered. Manual compliance could also be a contributing factor. Very small businesses typically have fewer resources to devote to sales tax compliance and are more likely to handle it manually. This is a hassle under the best of circumstances; for businesses required to collect and remit in multiple states, it can quickly become extremely burdensome.
The good news is that most state economic nexus laws do provide an exception for small retailers whose sales are below a certain threshold. In South Dakota, for example, the threshold is $100,000 in sales or 200 transactions in the current or previous calendar year; in New York, it’s $500,000 in sales during the previous four sales tax quarters. Because thresholds vary in each state, businesses must constantly monitor their sales into all states. And because a threshold can be as low as $100,000 or 200 transactions, economic nexus can affect even very small businesses.
Businesses Aren’t Just Concerned With Sales Tax Filing
Respondents were also asked how Wayfair-related laws had impacted their businesses. In March, the top three impacts on businesses were increased number of states where registered to collect/file sales tax, increased complexity for sales tax calculation/filing activity, and an increased need for additional tools/technology. Interestingly, 45 percent of businesses noted new registration requirements as the top impact. Since a business cannot even begin collecting sales tax in a new state without registering and paying fees to obtain a sales tax permit and/or business license, the more states where businesses have triggered economic nexus obligations increases the hassle of registering.
Tax Automation and Technology is Becoming a Requirement
With an increase in obligations due to online sales, the survey found that more businesses are managing tax compliance by enlisting the help of technology. Roughly four in 10 respondents are using some sort of automated solution to address sales tax compliance challenges brought on by Wayfair and subsequent state laws. According to the survey, the top three tools used to manage compliance are accounting software, automated solutions, and functionality built into point-of-sale systems. Conversely, it was also found that 31 percent of respondents still rely on manual sales tax calculation and filing tools, such as tax rate tables and spreadsheets.
Liz Armbruester is senior vice president of global compliance operations at Avalara, automated tax compliance software.