Biz Tips: The Boon in Ecommerce Is Setting Up Large Tax Liabilities For Sellers

Biz Tips: The Boon in Ecommerce Is Setting Up Large Tax Liabilities For Sellers

Biz Tip:

The Boon in Ecommerce Is Setting Up Large Tax Liabilities For Sellers

Ecommerce has seen a major uptick in recent months largely due to stay-at-home orders and business closures. In fact, some online industries like home fitness saw more than 320% growth in transactions during April. While a boon in business is never a bad thing, many retailers could be finding themselves with significant tax risk in the future due to the rapid increase in sales today.

Following the South Dakota v. Wayfair ruling in 2018, states were given the ability to impose sales tax on online sales from remote sellers. Today, more than 43 out of the 45 states that have a general sales tax and the District of Columbia have economic nexus laws that require remote sellers to pay sales tax for online sales if they reach a certain transaction threshold. While many businesses are focused on continuing to generate sales and serving customers during this uncertain time, they need to be aware of the sales tax enforcement that will likely ramp up in the coming months.

New Economic Nexus Obligations

Although it’s coming up on two years since the Wayfair decision, there are still a tremendous number of businesses that may have heard of Wayfair but have not evaluated how it impacts their business. In a recent study to determine the awareness and impact of Wayfair-related laws on businesses, it was found that 43% of businesses hadn’t heard of the South Dakota v. Wayfair, Inc. Supreme Court decision and were unfamiliar with its implications for their sales tax obligations.

Whether a business is selling online for the first time or seeing their online business grow during this time, it’s likely that many retailers are triggering new economic nexus obligations across the country. These new laws have had a material impact on the time and resources required for small businesses to research, prepare, file, and remit sales tax. With each new state that a business must collect and remit sales tax, businesses face the onerous process of manually extracting sales tax calculation data from multiple sales channels, as well as navigating individual state Department of Revenue websites for filing and remittance.

Due to the prevalence and popularity of major online marketplaces, many ecommerce sellers now also include a marketplace storefront in their online strategy. While marketplace facilitator laws in many states require the marketplace itself to collect and remit sales tax for third-party sellers, the sales made through marketplaces generally contribute to a retailer’s overall transaction volume, so it’s important to monitor sales across all channels to understand where they are at risk of triggering economic nexus thresholds. Likewise, while marketplace sales contribute to economic nexus thresholds, some states also require third-party sellers to file returns for sales made through marketplaces.

For businesses that have ramped up sales through online channels during the pandemic, it is likely that they have unknowingly triggered new economic nexus obligations. For businesses that don’t have the processes and technology in place to manage changing sales tax obligations in real-time, a boost in ecommerce sales can make this task extremely time-consuming and costly to manage, while also putting their business at risk for future audits.

Increased Government Enforcement

Though most states have implemented Wayfair laws, the Covid-19 pandemic has forced state revenue departments to ease up on enforcement efforts as auditors and taxpayers work remotely. In fact, most states offered sales tax relief in the form of tax filing and payment extensions, temporary rate reductions, and interest and penalty waivers for lodging tax and sales and use tax at the onset of the pandemic. However, most state sales tax relief measures have already expired or are set to expire soon, so businesses should be prepared for increased enforcement at the state level.

While it is likely that enforcement will increase, businesses must also be aware of the changes states are making to sales tax laws in the wake of the recession tied to Covid-19. To keep pace with ongoing pandemic relief and economic support programs, states must balance their budgets. To do so, many are getting creative with how they are using sales tax to recoup lost revenue. For example, Tennessee recently moved to lower the threshold for economic nexus obligations from $500,000 to $100,000 in revenue. As enforcement ramps, businesses that may have been compliant prior to Covid-19 related legislation changes could now be at risk of non-compliance and audit.

A combination of changing tax laws and an acceleration of enforcement will put pressure on retailers to ensure that they are compliant while still managing the day-to-day operations of their business in the midst of a pandemic. While many retailers have been and are continuing to be focused on keeping their business afloat, failing to comply with new economic nexus obligations brought on by an increase in online sales and changing legislation will have a long-lasting financial impact on retailers as governments come looking for the sales tax that is owed.

The rapidly changing sales tax landscape has placed more compliance obligations on online businesses than ever before and the patchwork of economic nexus laws by state is not going anywhere. Ecommerce businesses manually managing the ever-changing matrix of sales tax rates and rules are at risk for future audits. Fortunately, tax automation technology tracks changing obligations in real time, allowing businesses to remain compliant without spending hours of time tracking new obligations on their own. As tax compliance makes its way upstream to the point of transaction for ecommerce sellers, tax automation will no longer be an option but a requirement for ecommerce businesses to stay compliant.

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