Analysis: How to survive, thrive in the post South Dakota v. Wayfair world
June 21, 2019 marks the one-year anniversary of South Dakota v. Wayfair, Inc., the landmark decision by the Supreme Court of the United States that rocked the world of retail. By striking down the physical presence rule that for decades prevented states from taxing remote sales, Wayfair revolutionized sales tax collection in America. How are states and businesses faring since the decision?
Decades of precedent don’t change without growing pains. Although a year has passed, both states and businesses are still struggling with the fallout from the ruling. No longer limited by the physical presence rule, states are enacting a plethora of remote sales tax laws. Meanwhile, businesses are grappling with their ever-expanding sales tax obligations.
Rules and laws continue to fluctuate as states seek the best way to increase remote sales tax collections and work out the kinks of their new policies. Like South Dakota, most states have adopted economic nexus, which bases a sales tax collection obligation solely on a remote seller’s economic activity in the state. In fact, of the 45 states (plus the District of Columbia) with a general sales tax, only Florida, Kansas, and Missouri have yet to do so.
Marketplace facilitator laws are adding another layer of complexity to remote sales tax compliance. More than 30 states now require marketplaces like Amazon, eBay, and Etsy to collect and remit sales tax on behalf of third-party sellers. Thus, in addition to learning about and complying with economic nexus laws, businesses must learn about and comply with marketplace laws, which of course vary by state. While marketplace laws may eventually facilitate sales tax compliance for some remote sellers, they can make compliance more cumbersome for others, especially multi-channel sellers.
In this turbulent environment, simply finding accurate information can be hard, and state legislatures and tax departments don’t always give remote sellers a lot of advanced notice. For example, the New York Department of Taxation and Finance announced in January 2019 that the Wayfair decision allowed it to tax remote sales effective “immediately” (aka, as of June 21, 2018). In April of this year, the California Assembly changed the state’s economic nexus threshold almost a month after an economic nexus rule took effect.
In short, the salad days for e-commerce sellers are over. Like your brick-and-mortar counterparts, you’re now required to collect and remit sales tax almost everywhere you sell. So, what steps can you take to survive and thrive in the post-Wayfair world?
Step 1: Take stock of how you sell. Many internet retailers sell through a variety of channels: an independent e-commerce store and one or more marketplaces. The first step on the path to sales tax compliance is calculating your sales through each channel in each state.
It’s important to separate marketplace transactions because so many states now require marketplaces to collect and remit tax on third-party sales. Indeed, there’s a good chance that all states will have a marketplace facilitator sales tax law eventually.
Marketplace facilitator laws don’t necessarily free retailers from all sales tax obligations: You may still need to register with the tax department and file returns even if marketplaces collect and remit sales tax on your behalf. That’s the case in Connecticut.
Step 2: Determine where you have nexus. Once you know where and how you sell, you need to determine where you have nexus. It’s no longer simply about physical presence (though even physical presence nexus has its challenges).
State economic nexus laws base a sales tax collection obligation on a remote seller’s sales volume into the state, measured in dollars and/or transactions. Since all states also allow an exception for small sellers, you may not have an obligation to collect tax in all states with economic nexus.
The thresholds vary quite a bit. Many states — but not all — have adopted South Dakota’s small seller threshold of $100,000 in sales or 200 transactions in the state in the current or previous calendar year. However, Alabama’s threshold is more than $250,000, while Colorado’s is at least $250,000 and at least 200 retail sales. As befitting their size, California and Texas have the highest thresholds, at $500,000.
Determining whether you’ve met or exceeded a state’s threshold is challenging because the particulars of the law vary from state to state. For example, some states include digital goods and services and/or exempt transactions in the threshold, while others don’t. Marketplace sales are included in the threshold in some states, while in others they’re excluded. Furthermore, these thresholds are subject to change.
Step 3: Automate sales tax compliance. Keeping up with new sales tax laws and collection requirements is an exercise in frustration. For retailers with a high volume in sales in multiple states, it can be downright overwhelming.
The most effective way to deal with sales tax compliance in the post-Wayfair world is to automate sales tax collection, remittance, and filing. States know this to be true: Those that are members of the Streamline Sales and Use Tax Agreement subsidize sales tax software for certain voluntary sellers. Even some non-SST states like Pennsylvania are encouraging remote sellers to outsource the bulk of sales and use tax compliance to a Certified Service Provider.
In addition to helping with the nuts and bolts of compliance, some sales tax software providers can help determine where you have nexus. And since they specialize in sales tax, these solutions should quickly adapt to new and changing sales tax laws.
What will the future hold? The Wayfair ruling is big, but it’s not the only thing affecting sales tax. Expect new challenges in the coming months and years as states embrace a new global trend: real-time compliance. It’s becoming more prevalent worldwide as tax authorities strive to prevent tax evasion.
Several states, including Massachusetts and New York, have already considered real-time tax collection. While an exciting possibility for governments, it could put businesses in a tricky spot: Most lack the technological capability to comply with real-time collection.
Gail Cole is content editor at Avalara, a software for automated tax compliance.