More than 230 million U.S. consumers are expected to be shopping online by 2021.
As commerce has, increasingly, moved into the digital realm, and even the smallest merchants have gone omnichannel, tax policy has evolved as well — although perhaps it may be more apt to say tax policy has scrambled to keep up.
Seismic change in tax policy came last year in the form of a ruling from the Supreme Court, through the case captioned South Dakota v. Wayfair. The ruling meant that online retailers could be mandated to collect sales tax — and taxes can be levied by states on firms that do not have physical presence in those states.
Thus far, a bit more than a year after the ruling, tax policy remains fragmented. One consideration is the fact that economic presence within a state means that retailers have to collect and remit taxes in those states. The laws themselves may depend on the number of thresholds, i.e. tied to a sales threshold above, say $250,000, or a number of transactions in each state.
For example, in Illinois the thresholds are at least $100,000 in taxable sales or 200 or more separate sales into the state. Kansas is an outlier with no thresholds in place — which means every business selling into the state is mandated to collect and remit sales tax.
And in other wrinkles, more than 30 states have what are known as “marketplace facilitator” provisions that stipulate platforms that enable third-party vendors to sell their products must collect and remit taxes on behalf of their marketplace sellers. While this could be seen as a relief to sellers, in an omnichannel environment, the data management required to navigate these marketplace laws is complex.
As it stands now, the number of states with economic nexus laws on the books is 43, plus Washington, D.C. Of states that collect sales tax, only Florida and Missouri have not yet introduced legislation on this front. For marketplace facilitator laws, the count is 34 states, along with Washington, D.C.
In an interview with PYMNTS, Greg Chapman, senior vice president of business development at Avalara, said the reality of Wayfair, and how it changes the eCommerce landscape, is becoming much more immediate for retailers.
That’s especially true, he said, for firms with economic presence in larger states, such as California and New York, where a significant level of transactional activity takes place, and where tax collection efforts are becoming more aggressive than had been seen before the Supreme Court ruling.
“One issue is that online marketplaces are adopting these laws at different times,” Chapman told PYMNTS, and complexity reigns as many states have far-flung and disparate tax policies. “You have to understand the nuances between South Dakota, California, and, say, Kansas, which has a ‘zero’ nexus.”
For the retailers, he said, there’s been heightened awareness — and even a bit of anxiety — about tax compliance and how to go about entering new states and jurisdictions.
In that case, there are a number of reporting and filing requirements. The direct sales are to be tracked and reported by the companies, while in the marketplace model, the Amazon or the eBay is going file and collect taxes on the seller’s behalf, acting as the merchant of record.
With all of the moving pieces when companies transact across all of those conduits, they may hit thresholds for tax liabilities in different states — and may not even know it.
As a result, audits and penalties may loom. The costs of compliance — both in terms of administration and financial penalties — can mount. As Chapman said, the pain may be especially acute for smaller companies.
“For the first time in their lives, they are facing real risk of penalties, and they have to file back taxes if, in fact, they were not compliant before,” he said. “It’s a big issue, and the smaller merchants are now on the line just like the bigger ones” that can afford to have teams in place to grapple with tax considerations.
That’s no easy hurdle for smaller companies that may have 10 employees or fewer.
The Role of Technology
Against this backdrop, Chapman said, technology (and automation) plays a role in helping executives monitor just where they stand across the taxation landscape, on a state-by-state and channel-by-channel basis — and where they are headed.
Speaking generally, he said, maps with graphics and visual representations (such as those provided through Avalara) can show, in green, yellow and red alerts where transactions are nearing or have crossed various economic nexus thresholds. With those alerts, companies know they have to register and file taxes.
As he told PYMNTS, “The right solution is something that is simple and visual.”
Such simplicity is especially valuable as companies move toward marketplaces to sell their goods — and where, in a rough estimate, hundreds of marketplaces operating across 50 states are going to have complex tax obligations.
Embracing the Marketplace
Over time, he said, through the next several months, once retailers and marketplaces move past confusion and complexity, the trend may be toward more of a “merchant of record” accounting. It will become more attractive for companies simply to rely on Amazon, eBay and others to take care of transactions and tax collections. In that transition, he said, firms’ own websites will be points of referral, directing consumers to the platforms where they will ultimately transact.
“The more these eCommerce platforms can make tax simple and have it built in and have an easy ‘click and submit’ process,” he told PYMNTS, the more attractive they may become to smaller merchants. As a result, he said, “we’re seeing the trend toward these bigger platforms building robust tax functionality.”