What a 48 months it’s been.
The Supreme Court Wayfair decision four years ago gave tax jurisdictions the sudden power to require countless companies to collect and remit sales tax. Those governments jumped the on chance for such big revenue – and continue to do so. In many respects, Wayfair also opened the path to levying additional kinds of tax obligations on businesses that sell online as eCommerce becomes more and popular.
The last four years seem to be just the dawn of a new era of sales tax.
The day of change
In early June of 2018, sales tax news showed an industry evolving steadily but locally, as individual states, cities and even towns made most of the headlines. Then came the Supreme Court’s 5-4 decision in South Dakota v. Wayfair, Inc. et al. An out-of-state seller could establish “nexus” through just economic activity in such tax jurisdictions as states, as the Court overturned a 1992 decision and decreed that physical presence alone in the internet age is no longer required to create nexus.
States quickly set individual economic nexus triggers based on in-state revenue or transactions ($250,000 per year in sales in a state, for example, or greater than $100,000 in sales or 200 or more separate transactions, though states’ individual thresholds varied – and still do).
Sellers found themselves having to evaluate changing tax responsibilities under both economic nexus thresholds and physical presence standards. Additional activities began to appear as nexus triggers: sales reps or technicians traveling on business into another state; employees exhibiting at trade shows; or even just maintaining inventory in a warehouse in another state. Click-through nexus or cookies to track customer activity all became potential sources for sales-tax collection, and soon new laws required third-party marketplace facilitators to collect and remit sales and use taxes.
Questions arose: Are my products taxable? How is technology being taxed? New nexus rules may be one thing for giants like Amazon with their own internal tax compliance divisions, but how were smaller companies supposed to keep up? Just how many different tax jurisdictions are there, anyway? (More than 10,000 nationwide, and still counting.)
Through 2019, companies began to feel the pinch. Early that winter, a survey from The American Catalog Mailers Association showed that despite states’ early predictions of minimal harm to direct/online retailers from Wayfair, companies were reporting decreased sales, hefty initial investments for sales tax collection software and recurring expenses of compliance, and competitive disadvantages against smaller competitors who didn’t surpass thresholds for economic nexus.
A complex situation grows
Twenty-four states and the District of Columbia had added enforcement of economic nexus in 2019, in addition to the 19 that added the burden to online retailers right after Wayfair. Among states without a sales tax, Alaska municipalities were banding together to administer local sales taxes on remote commerce. Of all states with a sales tax, only Florida and Missouri remained holdouts when it came to enforcing economic nexus for out-of-state sellers.
Companies were also finding economic nexus complex when it came to keeping straight the tax reports, calendars, new filing requirements and management of notices from tax jurisdictions. Companies also wondered if they were collecting and remitting the correct sales tax – and if they were at risk for audit.
States and jurisdictions, once slow to ramp up penalties for non-compliance, were becoming more serious by the spring of 2020. California had sent letters to Amazon sellers saying that they may owe years of uncollected sales taxes and be facing audits. More states promised similar actions.
Soon a congressional subcommittee met to discuss how Wayfair was hurting businesses. Testimony called collecting and remitting sales tax across 10,814 jurisdictions “nightmarishly complex,” and the government promised they’d look into more consistency between sales and income tax nexus rules; clearer definitions of marketplace facilitators; standardized measurement periods for economic thresholds; and a grace period for sales tax obligations.
They’re still looking.
Covid ignites eCommerce
As shelter-in-place and work-from-home became the new norm in a spreading pandemic, giant retailers began shuttering stores, reducing hours or limiting the number of customers allowed in a store at the same time. As brick-and-mortar stores became increasingly inaccessible, e-commerce boomed.
U.S. retail e-commerce sales hit some $160 billion in the first quarter of 2020. For the last three quarters of the year, those sales would hit some $210 billion each quarter. Widespread quarantines and lockdowns and the resulting remote work and education also spiked demand for video and chat software, often delivered as a software as a service that many jurisdictions subjected to sales tax. Mushrooming sales meant that more online businesses were likely to incur sales tax obligations.
Adding to the pressure: Tax jurisdictions began predicting major revenue shortfalls. According to The Tax Policy Center, April 2020 collections had dropped 16 percent in 42 states surveyed; year over year, state tax revenues had declined in 34 states. Sales taxes in the second quarter fared little better, plunging 9.8 percent compared with the same quarter in 2019.
When would states intensify audits? How long would states be willing to waive obligations?
By that fall, though, states began to realize that sales taxes – largely from online transactions – were the one bright spot in their revenue streams. Forecasts also said U.S. online sales in the last eight weeks of 2020 would hit $189 billion, nearly two years’ growth in one holiday-shopping season.
For gift-giving holidays for the first half of 2021, more than one in three consumers shopped for gifts online, well above pre-pandemic levels. Surveys found that year over year from 2019 to 2020, e-commerce about doubled in every season.
What did the pandemic do to coffers of tax jurisdictions? States didn’t seem sure for a while. Then they began reporting actual sales tax surpluses (sometimes record ones) that largely continue to this day.
Wayfair tax obligations here to stay
Florida and Missouri recently completed the lineup of states with a sales tax that enforce economic nexus. Alaska seems likely to continue to combine communities’ individual efforts to enforce economic nexus, though the state itself (so far) has no sales tax.
Among other likely areas for new or intensifying sales tax obligations will be marketplace facilitators, digital products, video conferencing (virtual sales tax audits have already begun in some states) and perhaps an increasing number of services. On the flip side, sales tax breaks are appearing, most notably in such areas as groceries as inflation continues to rise, and sales tax holidays are growing in popularity.
Sellers have also begun pushing back. An Arizona company, for instance, sued Louisiana for that state’s patchwork “compliance nightmare” in what many regard as the business’ first major counter-assault on the burdens of nationwide yet diverse economic nexus.
Reflecting the industry at large as we neared Wayfair’s fourth anniversary, the second annual TaxConnex sales tax survey again found that increasing sales tax complexities, growing nexus, fear of sales tax audits and limited resources to remain compliant were among the top worries of financial professionals. Three-quarters of respondents said online sales as a percentage of revenue had increased in the last two years – yet three out of five weren’t completely satisfied with how they managed sales tax.
The fifth year of the post-Wayfair world will likely see these trends continue, with the obligations of sales tax only continuing to tighten.
If you look to focus on running your business, you can remove the burden of keeping up with the ever-changing sale tax regulations. Work with TaxConnex and the burden is no longer on you – it’s all on us.