Wayfair’s 7th birthday: Sales tax changes continue

The Supreme Court’s decision in Wayfair seven years ago this month changed the world of eCommerce. Suddenly all states could require many remote sellers to collect and remit sales tax. Not to mention that eCommerce was set to skyrocket around the time of the landmark case anyway and later zoomed from online shopping during the pandemic.

States have gotten hungrier for tax revenue as the months have gone by – but continue to use a dizzying number of individual economic nexus thresholds ($250,000 per year in sales in a state, for example, or 200 or more separate transactions) even as they ease nexus thresholds and sales taxes on various items.

Though marketplace facilitators and even some payment platforms have recently stepped up to help with sales tax obligations, eCommerce and sellers’ burden has only grown more complicated since 2018, with no end in sight. Here’s an overview of the latest developments.

Execs stay worried. Our latest annual survey of top finance execs showed that almost half (48%) are “not fully satisfied” with how their business handles sales tax compliance. Among respondents’ top-cited challenges are keeping up with tax code changes and sales tax rates, retaining experts to help with sales tax obligations and the time and expense needed to manage the whole process.

Sales tax is also popping up more as a deal-breaker in M&As – usually unearthed too late in due diligence – even as eCommerce continues to explode as demonstrated by last holidays’ shopping season.

Overall complications. Sales tax exemptions and holidays were all the rage for a while, the latter a favorite of politicos but of questionable financial value to both consumers and states’ coffers. Now states seem to be cutting back almost as often as they bring out new exemptions and holidays.

Missouri, for instance, has new exemptions for streaming and satellite TV companies from local franchise fees. Groceries and baby supplies continue to benefit from new exemptions, most lately in Nevada, with feminine hygiene products not far behind. And more states are instituting or trying to institute taxes on digital goods and services (expect states to broaden their parameters of “digital,” too).

Two states have changed their sales tax sourcing rules. In Illinois, an amended Retailers’ Occupation Tax Act provides that a retailer that makes retail sales of tangible personal property to Illinois customers from outside the state and is “engaged in the occupation of selling at retail in Illinois” incurs the tax, among other details. The Tennessee Works Tax Act  adopted Streamlined Sales Tax sourcing rules for a retail sale of a product from outside of Tennessee into the state.

New Jersey, meanwhile, has repealed its annual sales tax holiday for certain school supplies and sports or recreational equipment. Nebraska lawmakers are reportedly set to debate ending some 70 sales tax exemptions as part of an effort to make up for cuts in property taxes.

Drop shipments. Proliferation of e-commerce has increased these transactions, with the retailer often between the end consumer and the supplier/distributor. These shipment transactions have confusing sales tax rules, as many companies now have an online presence for taking orders and making retail sales of tangible personal property without maintaining any inventory and instead leveraging other suppliers/distributors who “drop ship” directly to the customer.

RDFs. Retail delivery fees are one of the most contentious trends in eCommerce, roughly 25 to 50 cents tagged on to the price of each order delivered to an address (what’s been called a special, and legislatively fought, burden for small vendors). The money goes to infrastructure improvements and initiatives to fight carbon initiations. Colorado and Minnesota have RDFs so far, though other states are discussing them, including Washington. Kentucky also recently incorporated “delivery charges” into items’ total price for sales tax calculations.

Home rule. Some states continue to sales tax obligations even tougher with “home rule,” under which jurisdictions can pass their own, additional tax laws in such states as Alaska, Louisiana and Colorado, among others. In Colorado, for example, home rule jurisdictions can set both their own sales tax administration and their own sales tax bases.

Enforcement. States have formed watchdog coalitions like the Southeastern Association of Tax Administrator to collaborate and identify sales tax crimes and giving tax administrators the chance to investigate whether sales tax has been paid. (Sales tax audits, and the inability to prepare for them, also remain a top worry among execs in our recent survey; many states are also beginning to do virtual audits.)

A recent U.S. Senate subcommittee hearing examining relief for small businesses from remote sales tax collection saw testimony from experts in the sales tax industry and heard that calculating the correct tax to collect from customers “shouldn’t be a guessing game for the seller … States need to make the taxability rules, as well as rates and boundaries clear, accessible, understandable and fair.”

Tax breaks. Some states are trying to make post-Wayfair life easier by eliminating transaction thresholds to create economic nexus, including Alaska, North Carolina, South Dakota, California, Colorado, Iowa, Maine, North Dakota, Washington and Wisconsin. These states are among those now just requiring a set dollar volume of annual sales into a state to create economic nexus.

Happy birthday, Wayfair! And many more, we guess.

Let TaxConnex manage the burden of keeping up with all the changes and challenges that come with sales tax compliance. Contact us to learn what it means when sales tax compliance is all on us.