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The landmark 2018 Supreme Court decision transformed state sales tax for online businesses, and it continues to do so. Wayfair isn’t going anywhere.

Neither’s eCommerce, though: U.S. retail e-commerce sales last year were $833 billion at one point, up 7.6% from the same period in 2022. U.S. retail e-commerce sales are expected to top $2 trillion by 2027. Black Friday 2023 e-commerce spending jumped 7.5% from a year earlier; Americans also dropped $12.4 billion last Cyber Monday. Though they sometimes seem to slow, states’ sales tax revenues have only steadily increased since the pandemic. Ecommerce is also morphing into new forms like Q-commerce. No vendor would like to quit a marketplace like that just because of sales tax regulations.

Earlier this week, we looked at how complicated and, for online sellers, sometimes costly the sales tax landscape has been post-Wayfair. Now let’s see some of the latest products and services becoming subject to sales tax and some changes that might, believe it or not, benefit online businesses.

Changing scene 

One problem with sales tax post-Wayfair is that conditions of obligation change constantly for varied reasons. Take sales tax holidays, now prevalent in many states on everything from backpacks to emergency lanterns to trigger locks. These ballyhooed events have enjoyed a heyday that often confuses remote online sellers – but now might be retrenching as critics question the holidays’ value as more than a political stunt.

Then there are new products, many driven by cutting-edge technology, exploding markets of products produced and delivered in ways unprecedented for taxation. Recent examples include:

Software-as-a-Service (SaaS). SaaS is often delivered via a cloud-based subscription and may not seem to involve sales of tangible personal property (TPP). Yet not only the product but its configuration and training expenses might be taxable depending on whether the product is sold to a business or a consumer, unique state sales tax rates, home-rule jurisdictions and partial exemptions, among others.

Marketplace facilitators. Generally, a marketplace facilitator is a business or organization that contracts with third parties to sell goods and services on its platform and facilitates retail sales (think Amazon, Etsy, eBay and so on). States believe that marketplace facilitators constitute a rich source of tax revenue and have begun to mandate that they collect and remit tax just like everyone else. One wrinkle: Does a remote seller’s inventory warehoused by the likes of Amazon in various states constitute physical nexus for that seller? Most states haven’t weighed in but Pennsylvania has said no.

Digital advertising. This has become a hot new area of sales tax and has gone back and forth (especially in Maryland, where the idea began, ended with a governor’s veto and then began again). The tax applies to the annual gross revenues of a business derived from digital advertising services in a state, and so generally affects huge vendors with gross revenue measured globally. Nebraska, Tennessee, California, Massachusetts, New York, the District of Columbia and New Mexico are among others examining this kind of tax.

Cryptocurrency and non-fungible tokens (NFTs). Crypto now headlines federal 1040 tax returns and is a big target for IRS enforcement. Can sales taxes be far behind? Depends on the state, some of which have embraced virtual currency more avidly than others; most states have issued little or no sales tax guidance regarding crypto, though a few have said they regard its purchase as not subject to sales tax. Ditto NFTs, about which Pennsylvania, Michigan and Minnesota are among the few states that have issued any guidance.

TikTok. The household-name video showcase with more than a billion active users also offers TikTok Shop, which enables product discovery, checkout and post-payment activities. TikTok has claimed that it has hundreds of thousands of sellers. Is this a marketplace or an eCommerce platform? And how to manage TikTok Shop sales tax when selling on it?

RFDs. The months since Wayfair may have just made retailers more thin-skinned but many are quick to speak up about new kinds of expenses strongly resembling sales tax. For example, states’ new retail delivery fees (RDFs). Colorado was first with an RDF, two summers ago. The tax/fee is now 28 cents per package delivered within the state (with a retroactive small-seller exemption after a lot of initial howling by merchants), the money going to infrastructure and other initiatives. Minnesota is the only other state with official plans to roll out an RDF this summer, but Illinois and New York are also discussing them.

A bigger worry than ever 

The most recent TaxConnex survey of 100 top finance professionals regarding managing sales tax shows that obligations ignited by economic nexus remain a big concern.

Almost half of businesses (49%) are less than fully satisfied with their current approach to managing sales tax, with the top three reasons being not enough time to manage/keep up with it all, lack of guidance/education and lack of customer support. Only 9% of companies outsource sales tax management to a third-party, yet this group is the most satisfied with the way their sales tax obligations are managed.

Half of companies responding rely on internal teams to manage sales tax obligations, though 42% of financial leaders say that their lack of internal knowledge or expertise is the number one barrier keeping them from more easily managing their sales tax obligations. More than three out of every five (62%) respondents have difficulty attracting and retaining the talent to remain compliant with sales and use tax obligations. Many respondents also voice a lack of confidence in audit preparedness.

Actual breaks? 

Many states have been working lately to make their electronic filing and sales tax compliance systems easier to use. And call it compassion or a realization that some sales tax regs are cost-ineffective to enforce, but some states are easing their economic nexus thresholds.

Some 20 states have lowered their transaction thresholds, for instance, including South Dakota, which is removing the 200-transaction threshold. California, Colorado, Iowa, Maine, North Dakota, Washington, Wisconsin and, soon, Louisiana are also eliminating transaction-based nexus thresholds. (Some states never adopted one.)

Of course, some states seem intent on the opposite direction of helping online sellers. A bill that would raise the online sales tax in Alabama almost 25% over that for brick-and-mortar stores, for instance, has recently made progress with lawmakers. Supporters such as brick-and-mortar retailers say the sales tax of 8% for both their sales and those of internet retailers puts them at a disadvantage, as many of them operate in communities with higher combined sales taxes.

The next year of Wayfair should easily be as interesting for online retailers as the first six. Stay tuned.

If you think your business may be impacted by sales tax developments post-Wayfair, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more. 

Robert Dumas
Post by Robert Dumas
June 20, 2024
Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2006 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.