Did you know e-commerce businesses can now trigger a sales tax collection obligation in states where they have significant sales but no physical presence?
For decades, the prevailing rule was generally that only businesses with a physical presence in a state could be required to register, collect the applicable sales taxes and remit the collected revenue to the appropriate tax authorities. Since many e-commerce businesses have a limited physical footprint, the physical presence rule protected them from having to collect sales tax in many states. But those days are over.
Last summer, the Supreme Court of the United States overruled the physical presence rule in its decision on South Dakota v. Wayfair, Inc. (June 21, 2018). While physical presence in a state continues to trigger a sales tax collection obligation, the Supreme Court found that a business’s “economic and virtual contacts” with a state could also be a sufficient basis for sales tax nexus (the connection between a business and a state that permits a state to tax the business’s sales). Thus, a state can impose a sales tax collection obligation on a business with substantial sales but no physical presence in the state.
The impact of the Wayfair ruling on e-commerce throughout the United States can’t be overstated. Businesses now need to monitor state sales tax laws (which are subject to change), as well as their own sales in all states. Even relatively small sellers can find themselves with a sales tax collection obligation in multiple states.
Remote seller sales tax nexus laws:
Approximately 35 states have adopted new sales tax requirements for remote sellers since the Wayfair ruling. Most base a sales tax collection obligation on economic nexus, or a remote seller’s economic activity in the state, though states are expanding sales tax collection requirements in other ways, too.
The Supreme Court didn’t replace the physical presence rule with a similar bright-line test. However, it praised three aspects of South Dakota law that “appear designed to prevent discrimination against or undue burdens upon interstate commerce.” These are:
- Safe harbor for small businesses. South Dakota’s economic nexus law provides an exception for businesses with $100,000 or less in sales or fewer than 200 transactions into the state in the current or previous calendar year.
- Prospective enforcement of economic nexus. South Dakota won’t hold businesses liable for tax on sales made prior to the effective date of the law.
- Simplified sales tax compliance. South Dakota is a member of the Streamlined Sales and Use Tax Agreement (SSUTA), meaning it’s taken steps to simplify sales tax compliance for remote sellers and reduce the associated costs.
Most states that have adopted economic nexus have followed South Dakota’s lead on the first two points: They offer safe harbor for small sellers and ban retroactive enforcement of their remote sales tax laws. This could change; New York recently announced a new economic nexus rule that it may enforce back to June 21, 2018.
Furthermore, there are differences between states’ remote sales tax laws. For example, Georgia’s small seller exception threshold is more than $250,000 in sales or at least 200 sales in the state, while both Pennsylvania and South Carolina have set the threshold at $100,000 in sales and the threshold in Texas is $500,000. Making matters more complex, each state threshold is based on different activities: Some states include all sales into the state, some merely sales of taxable tangible personal property, and so on.
Regarding the third point, it’s no simple task to join the SSUTA. Currently there are 24 Streamlined Sales Tax member states, and a few non-member states are working to simplify sales tax compliance for remote businesses. In other states, the status quo seems to be good enough.
As more states jump on the remote sales tax bandwagon, sales tax compliance becomes more challenging for e-commerce businesses with nationwide sales. Merely understanding all the laws can easily feel overwhelming, to say nothing of trying to comply with them.
Sales tax compliance tips for e-commerce businesses:
As with many challenges, it’s good to tackle sales tax compliance head on rather than wait to get bowled over by it. Consider taking the following steps toward the path to compliance:
- Learn which states impose a sales tax collection obligation on remote sellers. This up-to-date chart is a good place to start.
- Figure out where you make sales, and where you do and don’t collect sales tax.
- Compare state remote sales tax requirements with your sales into each state. This state-by-state guide to nexus laws is a good place to start.
- Discuss your situation with a trusted tax advisor.
Once you have a good understanding of where you need to collect today, you’ll have to decide how you want to tackle compliance now and in the future. You could handle it manually, though that will become increasingly difficult as you expand into new markets. You could also automate sales tax collection, remittance and filing with a third party like Avalara. ChannelAdvisor and Avalara will work in close collaboration to assist brands and retailers affected by a Supreme Court ruling allowing states to tax remote sales.
With the combination of ChannelAdvisor’s robust software and Avalara’s sales tax compliance tools, brands and retailers can proactively manage online sales and accurately calculate their tax obligation under the new court-mandated policies. As sellers expand to keep pace with the rapidly-evolving e-commerce landscape, developing a streamlined sales tax process becomes increasingly critical to tracking and protecting revenue.
Guest post by Avalara, a leading provider of tax compliance software
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