Two years have passed since the South Dakota v. Wayfair, Inc. Supreme Court ruling granted states the ability to impose sales tax obligations on the online sales made by remote sellers. While the landmark ruling opened the door to an entirely new era of tax compliance obligations for businesses—where customers, rather than the seller, now determine where a business has nexus—no one could have anticipated the wide-reaching impact the decision would have on how businesses manage their entire financial operation.
With 43 states and the District of Columbia currently enforcing a Wayfair-related law, the expansion of nexus obligations has forever changed how businesses manage the entire transaction life-cycle. As a result, perhaps one of the most wide-reaching impacts of the Wayfair decision has been the increase in the digital transformation of the finance function across businesses.
While the ruling itself granted states the ability to tax remote sellers, the decision to implement any resulting legislation has been left up to each state’s discretion. Consequently, the sales volume and transaction thresholds that trigger remote economic nexus obligations vary from state-to-state and those rules are changing all the time, which has made it very difficult for businesses to keep track of the laws and stay compliant.
Prior to Wayfair, many businesses were able to manually manage their sales tax obligations because they only had sales tax obligations in one or two states. In a post-Wayfair world, some businesses now have obligations in tens of states. As the sales tax obligations have increased for online sellers, we’ve seen more businesses turn to technology to get compliant and keep pace with the changing rules and evolving threshold obligations across states.
Why digital transformation in tax exploded post-Wayfair
The Wayfair decision happened in the midst of a radical shift in how consumers and businesses think and go about making purchases. The rise of e-commerce platforms and online marketplaces has radically changed the expectations that buyers have when it comes to shopping, leading to a steady decline in traditional retail shopping, and an uptick in online commerce. As a result of these shifts, we all now live and operate in an increasingly digital economy.
Businesses rely on omnichannel strategies to sell to customers around the world, and online marketplaces to merchandise their products to a broader customer base. This digital-first, omnichannel approach to business means that sellers have had to adopt technology to power new selling channels and business systems. From in-store point-of-sale systems to e-commerce platforms to marketplaces to shipping services, businesses are leveraging more technology to manage multiple selling streams. While this rapid expansion of selling channels among online businesses was enough to trigger a massive explosion in digital transformation across the finance function alone, it wasn’t until after the Wayfair decision that we saw tax compliance really be brought into the fold for digital transformation.
While the rise of digital commerce and multichannel selling increased the sales tax complexity for many businesses prior to Wayfair, manual compliance management was still sufficient for many sellers who only had sales tax obligations in a handful of states. When those obligations skyrocketed due to economic nexus laws, many businesses quickly learned that managing transaction data for multiple online channels serving customers across the globe would require technology that could handle the entire compliance process from calculation to returns. In fact, a recent survey of business leaders found that 68% of businesses have adopted accounting software to manage the compliance challenges brought on by the Wayfair decision, while 43% have implemented an automated tax compliance solution.
Trends driving digital transformation in tax in the future
As we look beyond the second anniversary of Wayfair and the digital transformation that has taken place up to this point, there are a number of current trends and situations that will further accelerate the digital transformation of tax in the future, including:
The financial impact of stay-at-home orders brought on by the global pandemic has prompted more businesses to turn to online sales. For many businesses, this is the first time they’ve explored e-commerce and for others, their online presence has expanded rapidly. Since the onset of the pandemic, businesses without an online presence saw a decrease of 74% in transactions when compared to those in the industry who are able to sell online. During a time of rapid change, businesses will likely turn to technology to make the transition to online as easy as possible while managing risk throughout the process.
Digital tax legislation
Our digital-first economy has opened the door for digital-centric businesses to expand rapidly. As a result, taxing authorities in the U.S. and abroad are racing to implement taxes on digital businesses and services to create new revenue streams. For example, in France, the digital services tax introduced in 2019 imposes a tax at a rate of 3% on the gross revenues derived from digital activities, specifically digital intermediary services and the data collected about users through digital advertising, of which French “users” are deemed to play a major role in value creation.
Closer to home, a number of states are toying around with the idea of digital services taxation. For example, Maryland lawmakers have proposed a tax that mimics the digital advertising aspect of France’s legislation and would tax every digital ad on the computer screens of Maryland residents visiting websites. As digital taxes catch wind around the world, businesses and governments alike will need tax technology in place to keep pace with the changing legislation and enforcement tied to the rapid evolution of these digital businesses.
There is also an accelerating shift to real-time compliance globally, being mostly driven outside the U.S. with the adoption of live reporting and e-invoicing efforts. E-invoicing regimes require electronic records of all exchanges between buyers and sellers–with some countries requiring this for both business-to-business and business-to-customer transactions–that are then filed with tax authorities for verification. With e-invoicing requirements in place, governments have visibility into the amount of tax owed in real-time. In the U.S., earlier this year, Massachusetts proposed implementing new sales tax remittance requirements, which would put an onus on businesses and payment processors to provide sales tax collections from the first three weeks of a month to the state in the final week of that same month, rather than by the 20th of the following month. With this trend, work shifts from retroactive compliance to real-time authorization and live reporting, which cannot be done without technology in place.
Although some businesses have yet to implement new technology solutions in response to Wayfair-related laws, the past two years have seen an unprecedented shift toward technology to manage compliance. Major trends like real-time compliance and digital taxation will only hasten the need for tax technology as governments scramble to determine how they tax new products and services. Our digital-first way of life is not going away anytime soon, so adopting tax technology will be essential for businesses as e-commerce and multichannel selling continue to grow.
It’s difficult to foresee how state governments will adjust once Covid-19 tax relief measures are lifted, but businesses should be prepared for increased enforcement efforts. Couple this with cloud based solutions for any future “stay at home” orders or other work remote situations, makes implementing compliance technology now an imperative.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Amit Mathradas is president and COO of Avalara.