Black Friday looms, as does Cyber Monday, as well as the holiday shopping season that should see a bump and final flurry of consumer activity into the last few weeks of the year.
By some estimates, total dollars spent online through the holidays should grow by about 14 percent, to as much as $143.7 billion. Adobe has estimated that sales stretching from Thanksgiving to Cyber Monday should be worth as much as $29 billion.
And in the wake of all those sales lies a pressing issue for merchants plying their trades online: figuring out the tax liabilities.
After all, commerce is increasingly done across state lines, and remote sellers have the lure of selling into new and far-flung markets.
At the same time, navigating tax policies is proving to be a complex business. As has been well-reported in this space, the regulatory landscape is changing for companies in the wake of the 2018 Supreme Court decision captioned South Dakota v. Wayfair. The decision allowed counties, states and municipalities to pass laws that tax out-of-state sellers and the marketplaces that serve them. States have been defining their parameters for economic nexuses. Lawsuits have arisen over disputed back taxes owed to state and local governments, as noted in the Next-Gen Sales Tax Tracker, produced in collaboration between PYMNTS and Avalara.
In an interview with PYMNTS, Scott Peterson, vice president of U.S. tax policy at Avalara, noted that this holiday season is the second one post-Wayfair. Since last year, several more states have embraced economic nexus legislation – including large, consumer-dense states like California and New York.
Reflecting on what it all means near-term during the holidays, Peterson said, “The net effect is that there are going to be fewer sellers who can use sales tax as a competitive advantage … and there are going to be fewer consumers spending time looking for merchants who don’t charge sales tax.”
All of this means there will be fewer dollars to spend on products themselves, as sales taxes (ranging from 5 percent to 10 percent) will eat, at least a bit, into holiday spending budgets.
Beyond Black Friday, Cyber Monday and the December holidays, there remains a tax landscape that for merchants can be defined by a single word:
There are 12,000 jurisdictions, Peterson told PYMNTS – and that’s the easy part of grappling with tax compliance. “It’s simply a mathematical calculation – the price of the product times the tax rate,” he noted.
The hard part? Merchants may not know whether they have to apply tax rates and collect taxes in the first place.
There have been some notable efforts by states to take some of the guesswork out of the occasion. Maryland, said Peterson, has constructed a database that lists all the items that are taxable in the state. Conversely, Nebraska has a database that lists items that are exempt from taxes.
There may or may not be near-term proactivity by states to embrace such databases and educational efforts, said Peterson. Success, of course, depends on whether or not merchants seek out the information contained in those databases.
But as it stands now, education is a hit-or-miss proposition. Peterson told PYMNTS that, speaking generally, retailers get thick documents via mail and email detailing tax policies for each state in which they are licensed to do business – and all too often, they may not take the time to read through those documents.
You can bet, however, that they take the time to read through communications from tax authorities indicating that they are being audited or that they owe back taxes.
Then the scrambling begins. As Peterson pointed out, 15 months after Wayfair, we’re about to see a slew of new audits, targeting a fresh batch of merchants and examining sales from 2019 – and that’s just for starters.
Audits may increase as states share data with one another about smaller firms that log sales in several locations.
“For some of these people who have been audited by South Dakota, they have no idea that the next letter they are going to get will come from New York,” Peterson said.
One safeguard against surprise tax liabilities that may gain traction, he noted, comes as the National Association of Certified Service Providers is actively lobbying states’ departments of revenue to advocate software (tied to Avalara and its peers) to make it easier for retailers to be tax-compliant.
“When you certify the accuracy of a software company’s tax decisions, you are proactively giving the right answers on compliance to every one of their customers,” Peterson told PYMNTS.
The continued evolution of the post-Wayfair tax landscape may also give retailers what Peterson termed “that last shove they needed to update their software.”
As he noted, almost all of today’s online shopping carts, accounting systems and billing and invoicing systems have prebuilt connections to sales tax software – and firms will likely look at updating their legacy operations as a matter of necessity.
There has also been a widespread embrace of online marketplaces, Peterson told PYMNTS, a trend that is likely to continue.
One selling point for those marketplaces has been, and will be, to advertise that “if you sell on my marketplace, I will collect the sales tax so you do not have to worry about it,” he noted. “When you add a ‘legal requirement service’ for your customer, the marketplace model can become very sticky.”