WOBURN, United States — Due to a 2018 Supreme Court ruling, South Dakota vs. Wayfair, individual states can charge online retailers sales tax, even if they do not have a physical presence in the state itself, provided they meet an economic nexus threshold.
The implication for online retail is a complex sales tax scenario — with over 14,000 distinct United States tax jurisdictions making it difficult to navigate. As Covid-19 has prompted retailers to double down on their e-commerce efforts, both SMEs and larger corporate players must comply with thousands of different rules while trying to navigate an increasingly disrupted and multi-faceted retail landscape, creating room for error and oversight.
Founded in 2013, technology solutions firm TaxJar offers its clients automated sales tax calculations and returns. It works with over 20,000 customers, including Beautylish and Jane.com, and its service is integrated on major e-commerce platforms including Ebay, Amazon, Etsy and Shopify.
Now, BoF sits down with TaxJar Chief Revenue Officer Ryan Thompson to understand how tax compliance has become more complex in the wake of the pandemic, the nuances of operating in the US market, and the operational benefits and subsequent growth levers of automated solutions.
What defines a successful sales tax strategy today?
In the past, it was ok to simply be reactive to sales tax rules. You were able to roughly figure out what to do to be compliant. The Supreme Court South Dakota vs. Wayfair ruling changed that by introducing the idea of economic nexus, not just physical nexus. Now, the onus will be on the merchants — and the ones that will do this the best will be the ones that look ahead to ask, “Based on my sales trajectory by state, when do I expect to cross thresholds, so that I’m in a good place to collect?”
Additionally, states are continuing to add more and more taxable categories as they see sales tax as an opportunity to recoup lost revenue brought on by Covid-19. Again, it will be on the retailers, their tax professionals or the software that they are using to ensure they are collecting and remitting the right amount of sales tax in all states where they have nexus. As new legislation is passed and new tax codes are set, the retailers that are taking a proactive approach to tax and thinking about what they need to be aware of in the next three, six, twelve months, will make all the difference.
How do significant retail holidays like Black Friday and Cyber Monday affect sales tax in the US?
Depending on the state, as you discount, that delta between your list price and your actual price may or may not be taxable. There are states where, if you discount 50 percent, you still need to collect tax at the retail price.
In the United States, we have more than 14,000 different tax jurisdictions. It can differ from one street to the next.
Specific to Black Friday and Cyber Monday, there are a few factors that can complicate tax compliance. The first is the higher percentage of online transactions for companies may trigger economic nexus in more states. Just managing that increase in sales is a challenge in itself, never mind navigating tax compliance.
The Black Friday and Cyber Monday events are also a common time for merchants to hit nexus thresholds where they have to start collecting sales tax in new states. Also, a merchant’s filing frequency in existing nexus states may increase with an increase in sales — for example, from quarterly to monthly filings. States may say, “Congrats, you’ve grown as a retailer and now you’re expected to file your sales tax return on a monthly basis.” This is something we see quite often.
How have the events of 2020 impacted tax compliance in the United States?
In the early days of the pandemic, states in the US were effectively extending tax filing deadlines for companies. As we are seeing spikes in infection rates here again in the US and also Europe, I wouldn’t be surprised if we see states do something similar again in a bid to help companies.
The biggest change that we have seen is the massive shift to online commerce. In May, a survey conducted by Salesforce Research found that over 68 percent of US consumers said that they would likely buy essential goods online, given the realities of Covid-19. Prior to the pandemic, commodity-type products had been a low online adoption category. These shifts — and the shift in general to online — has had a huge impact on retailers and how they manage their sales tax compliance.
While we are 50 states in the US, it can feel like 50 countries when it comes to sales tax compliance — there is simply no federal legislation for sales tax law. The Wayfair ruling’s introduction of economic nexus has raised the stakes for retailers as they attempt to navigate new rules and obligations around sales tax compliance.
How do tax strategies differ for online and offline commerce?
In a physical retail world, sales tax compliance is simpler. If you have a physical storefront and somebody comes in and buys something, then you are collecting sales tax at that point of sale, at a rate that applies to that location. When it comes to selling online, it’s far more intricate. Retailers are expected to collect sales tax where the item is being received by the buyer — often their home address. In the United States, we have more than 14,000 different tax jurisdictions. It can differ from one street to the next.
With all of the changes around economic nexus and the explosion of e-commerce, the complexity has gone through the roof.
The Wayfair ruling essentially changed the definition of economic nexus, so it relates to the amount of business in a state. If you don’t have any employees, a warehouse or don’t live in California, but you sell more than a given number of transactions or dollar amount there, then you may hit economic nexus in that state. You may be required to collect and remit sales tax in California, moving forward, as long as you continue to meet their definition of economic nexus.
People have been trying to figure this stuff out with spreadsheets. In the last couple of years, with all of the changes around economic nexus and the explosion of e-commerce, the complexity has just gone through the roof. While smaller companies may be able to manage sales tax compliance manually, larger companies could benefit from software to help automate some of the process.
What are the tax implications for international brands to be aware of, looking to trade in the US?
We hear from international merchants every single day who are looking at selling in the US, wondering what their sales tax obligations are. If you are an international merchant using some kind of warehousing in the US — whether that’s renting warehouse space or using third-party fulfilment via Amazon — then that may trigger nexus for you which may require you to collect and remit sales tax.
If you are selling in a state and you hit whatever that economic nexus threshold is, then you may be responsible for collecting and remitting sales tax. One of the things that happens downstream is that you need a US bank account to pay tax. The retailer will have to go through a process to set up a US account so that they can have funds in dollars to remit to the appropriate states.
How are the risks relating to tax management evolving?
The biggest change I have seen is that states are simply looking for more revenue — and the biggest opportunity they see is increasing revenue from sales tax. Revenue from income taxes will follow unemployment and property taxes are set years in advance. For fashion retailers, you will likely see states creating more taxable product categories, sending more timely nexus notifications and increasing the number of audits to quickly recoup revenue.
As we bring on new customers to TaxJar, less than 10 percent of them are adequately meeting their sales tax obligations. Many are missing states where they should be collecting and remitting sales tax. Tracking where you have economic nexus manually, without software means you’ll need to be vigilant of state by state law changes.
This is a sponsored feature paid for by TaxJar as part of a BoF partnership.