Wayfair Wave Hits Online Retailers in More States
In June 2018, the Supreme Court's decision in South Dakota v. Wayfair opened the floodgates to dramatic changes for online retailers by giving state governments a green light to collect a projected additional $8 billion in tax from e-commerce sales that was previously out of reach. Specifically, the Court ruled that states can mandate businesses without a physical presence in their jurisdiction to comply with their sales tax collection and remittance requirements, so long as they do so in a way that doesn’t constitute an “undue burden.”
Once the Court paved the way, states began enacting laws, rules and regulations imposing sales tax obligations on remote retailers in waves. And as we stand here today, all but two states (Missouri and Florida) have rules in effect, with Louisiana being a particularly tricky story. While Louisiana has a rule in place, the Sales and Use Tax Commission for Remote Sellers indicates it won’t truly be enforced until July 2020.
The most recent wave of states had their online sales tax rules go into effect on Oct. 1. While this was fewer states than in past waves, the rules and requirements imposed by these jurisdictions add a layer of complexity to an already tricky compliance landscape:
- Arizona: Sellers with more than $200,000 in Arizona gross sales will now be required to understand and comply with the state's relatively complex patchwork of state and local taxes. The small seller threshold in Arizona will drop each year for the next two years. By 2021, companies with sales of $100,000 or more will need to comply. While the distinction may seem subtle, qualifying Arizona sellers will be required to collect sales tax (what Arizona calls Transaction Privilege Tax) as opposed to seller’s use tax, increasing the local-level complexity significantly.
- Texas: Texas seems to have taken the “undue burden” obligation pretty seriously. It has a higher remote seller threshold ($500,000) than most states and offers eligible sellers (who so request from the Texas comptroller) a simplification that eliminates a considerable amount of local tax complexity.
- Tennessee: While Tennessee adopted a $500,000 threshold, it eliminated a simplification previously offered to “voluntary” remote sellers. Now, everyone selling from locations outside Tennessee must charge state tax plus the local rate prevailing at their customers’ locations.
- Kansas: A difference of opinion between the Office of the Attorney General and the Department of Revenue has left sellers uncertain as to whether compliance truly became mandatory for all remote sellers (regardless of size) as of Oct. 1.
- Massachusetts: With a $100,000 sales threshold, Massachusetts officially entered the economic nexus fray as of Oct. 1. However, remember it has a “cookie nexus” requirement dating back to October 2017, which is being challenged in the courts.
Also at the beginning of October, eight states — Arizona, California, Colorado, Maine, Massachusetts, Nevada, Texas, and Utah — implemented marketplace facilitator sales tax laws requiring online third-party marketplaces, such as eBay or Etsy, to collect sales tax on behalf of their remote seller clients.
Tax Compliance Complexities Abound
With so many changes happening on a state-by-state basis, online retailers should be mindful of their expanded registration, determination, filing and remittance requirements. Finance and IT teams at e-commerce companies, both large and small, often spend more time scrambling to keep up with these new requirements or dealing with fallout from negative audit results than they do focused on tasks that could grow their business. And things may be about to get even uglier. While states may not say it outright, there's a growing sentiment among Departments of Revenue that the time for taxpayer taxation has ended, and the time of taxpayer compliance has begun.
Technology for Modern Indirect Tax Challenges
As a rationale for its decision in South Dakota v. Wayfair, the Supreme Court noted there are affordable and manageable tax compliance solutions available today. It's likely the Court believed this technology would make it easier for online sellers to manage state-by-state compliance without significant problems.
Retailers must be flexible to keep up with the constantly changing sales and use tax rules unleashed by the Supreme Court decision. Having the right tax software in place and support from a knowledgeable solution provider will ease the transition and ensure companies remain in compliance.
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.
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.