The Top 3 Challenges Retailers Face With Economic Nexus
The Supreme Court’s 2018 historic ruling in South Dakota v. Wayfair opened the doors for states to collect tax revenue on internet sales coming into the state, even if a retailer wasn’t physically located within the state’s borders. While this was an opportunity for states to get revenue that was previously out of reach, no one could have imagined how important e-commerce would become to the U.S. economy. In fact, prior to the Court’s ruling, retail e-commerce sales in the U.S. accounted for more than $357 million. In May 2020, it accounted for more than $465 million — a 30.25 percent increase.
As states move from educating e-commerce sellers about their new collection obligation to active enforcement, compliance remains difficult for retailers of all sizes. According to a recent Sovos report, there are three factors that make compliance challenging: 1.) the sheer number of jurisdictions in the U.S., 2.) everchanging updates to sales tax rules and requirements, and 3.) the complexity of filing correctly.
1. The Number of U.S. Jurisdictions
Retailers are often required to document transactions and prepare returns across multiple jurisdictions, making compliance particularly challenging.
Today, sales tax requirements exist in 44 states (along with the District of Columbia and the Commonwealth of Puerto Rico), 2,211 counties and 7,776 incorporated cities, towns and villages, and in 2,039 special taxing districts. When you consider how these locations may overlap and intersect, there are more than 12,062 possible tax rate combinations across the country.
With sellers having vastly expanded tax responsibilities subsequent to Wayfair, managing compliance across multiple jurisdictions has become particularly challenging.
2. Constant Rate and Rule Changes
Tax rates and rules change all the time, making it difficult for retailers to keep pace of new updates. Just in the last year, there were no fewer than 571 state and local rate changes across the country. As if rate complexity weren't enough, retailers are also required to keep pace with legal and regulatory changes affecting sales tax.
According to Sovos’ report, as of July 2020, there were more than 2,200 pending or enacted bills related to sales tax under consideration, a 200 percent increase from the same time last year.
3. Varying Tax Forms From Each Jurisdiction
Knowing the proper rate and rule is only part of the battle retailers face. Compliance also mandates that tax is remitted and reported correctly. That said, the number of tax forms in use across all jurisdictions is growing at an astronomical pace. As of June 2020, Sovos supports a repository of over 7,290 tax forms and identified 637 changes to those forms since January.
So how can sellers keep pace with compliance? The answer: technology.
Technology’s Role in Sales Tax
In order for retailers to adapt to the challenges of expanded compliance requirements in a world where those requirements constantly change and evolve, they must turn to technology. By utilizing tax compliance software, companies can meet their sales and use tax obligations and minimize risks associated with noncompliance.
As state governments seek to collect additional revenue and enforce collection, it’s imperative that retailers understand tax rules and obligations to safeguard themselves from the risk of modern tax.
Charles Maniace is vice president of regulatory analysis and design at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax.
Related story: Wayfair Wave Hits Online Retailers in More States
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.