As the end of 2019 approaches, more businesses than ever are preparing to file annual sales tax returns. Many are e-commerce and marketplace sellers filing for the first time in states where they lack a physical presence. This can make the already monumental task of filing annual returns seem even more challenging.
Expanded state collection, remittance and filing requirements were triggered by the United States Supreme Court’s decision in South Dakota v. Wayfair, Inc. (June 21, 2018). The Wayfair ruling removed a longstanding physical presence rule, thereby enabling states to tax remote sales. States took to the new taxing authority like schoolchildren to recess.
Most states encouraged voluntary collection and remittance by remote sellers prior to Wayfair, but their efforts to require out-of-state sellers to collect and remit sales tax were often hampered by the physical presence rule. Post Wayfair, states can enforce remote sales tax collections via economic nexus laws, and they are. The Supreme Court has their back — as long as they don’t stray too far from the seminal South Dakota law.
Consequently, all but the smallest e-commerce sellers will likely be filing annual sales and use tax returns in more states this year. Even 2018 saw a marked increase in sales tax collections in the United States (up more than $847 million over 2017), due in part to remote sales tax revenue; most remote sales tax laws didn’t kick in until late 2018 or 2019.
Understand Marketplace Facilitator Laws
The growth of marketplace sales has also skyrocketed since Wayfair, though it was already on an upward trajectory. Consider Amazon’s numbers: Third-party sales accounted for three percent of Amazon’s total sales in 1999, surpassed direct sales for the first time in 2015 and comprised 58 percent of Amazon’s total sales in 2018. That’s tremendous growth, especially since the company’s direct sales jumped from $1.6 billion (1999) to $117 billion (2018) during that time.
Marketplace facilitators such as Amazon, eBay, Etsy and Walmart are responsible for collecting and remitting the tax due on third-party sales in a growing number of states under marketplace facilitator laws. The first states to make this move, Minnesota and Washington, did so in 2017. Come January 2020, 36 states will hold marketplace facilitators liable for marketplace sales tax — and that number will surely grow. In fact, North Carolina just enacted a marketplace facilitator law that will take effect February 1, 2020.
Unfortunately, for marketplace sellers, marketplace facilitator laws don’t necessarily relieve third-party sellers of all reporting requirements. While some states don’t require remote marketplace sellers to register for a sales tax license if their only sales in the state are through a collecting marketplace, others do. Some states make marketplace sellers take a deduction for sales that were taxed by a facilitator.
Although marketplace facilitator laws could eventually simplify compliance for third-party sellers, they currently add complexity to the sales tax compliance landscape in the following ways:
- Marketplace facilitator laws exist in 36 (soon to be 37) of the 43 states with economic nexus.
- Approximately 10 states allow remote marketplaces to comply with non-collecting seller reporting requirements rather than collect sales tax.
- Every state has a unique take on which sales should be included when calculating the small seller exception.
All of these differences compound the already complicated, time-consuming and tedious task of filing sales tax returns. This seller’s guide to sales tax nexus laws and state-by-state registration requirements for marketplace sellers provide more details.
Simplify sales tax filing with automation
It’s becoming increasingly challenging for e-commerce sellers, including marketplace sellers, to keep up with changing sales tax rules and compliance requirements. This year, in addition to filing returns in states where you know you have a collection obligation, you need to monitor your sales into states where you’re not collecting. A banner Black Friday or Cyber Monday could push your sales in any state over the economic nexus threshold.
Many businesses are turning to technology in this new reality, with good reason. ChannelAdvisor’s robust software solutions help e-commerce retailers navigate changing channels, markets, platforms and more. Likewise, Avalara’s sales tax software ensures businesses of all sizes register, collect and remit sales tax, file returns and manage exemption certificates as required by law.