Following the June 2018 U.S. Supreme Court decision in South Dakota v. Wayfair Inc., states can now enforce tax collection and remittance requirements against remote sellers the same way they have with in-state sellers for decades.
Now that every state with a sales tax has enacted rules that mandate sales tax collection for remote sellers, companies are feeling the full brunt of a vastly expanded compliance burden. Rates, rules, and requirements vary significantly from state to state, meaning that it’s an increasing challenge for companies to properly manage compliance. However, state certification of tax automation providers can be a viable path to making nationwide compliance manageable and affordable.
The Impact of the Wayfair decision
Prior to the Supreme Court’s decision, a seller would only be required to collect and remit sales tax if they had a physical presence in a state. Following the Wayfair decision, states were now able to require online and physically remote sellers to collect and remit tax, opening the doors to a new era for states and sellers alike.
As states began to take advantage of the Supreme Court’s decision and implement economic nexus laws, many states copied the South Dakota remote seller threshold of $100,000 in gross sales or 200 individual transactions precisely. They likely figured it was the safest approach to avoid a legal challenge. However, that only held true for so long. Eventually, many states began to shift the threshold in order to bring meaningful sellers into compliance without overloading the system with the smallest companies. As a result, online retailers now have to be in compliance with a patchwork of measuring periods, revenue amounts, and transaction count triggers. For example:
Many Alaska localities have a $100,000 sales or 200 transaction count transaction threshold that is based on statewide sales. Connecticut has a $100,000 sales / 200 transaction count trigger; but it only counts “retail” sales and registration is only required after you cross both thresholds. New York has a $500,000 threshold that only counts sales of “tangible personal property” coupled with a 100 transaction count trigger that doesn’t count individual transactions, but rather counts individual “sales.”
Not only that, but there are also laws in place across the country imposing new compliance requirements on online third-party marketplace like Amazon, Etsy, and Ebay, creating a challenging question as to whether or not an online seller counts marketplace sales against their thresholds. In most states, online retailers have to be compliant as soon as they meet the state’s threshold. That said, it’s important for remote sellers to track their economic activity closely to understand where and when they must start registering, collecting and remitting tax.
Streamlining Sales Tax for Remote Sellers
Once a business is required to collect and remit tax, the time has come to navigate the patchwork of rates, taxability rules, and filing requirements. And the reality is that maintaining compliance is not easy. With more than 640 rate changes since this time last year and 657 form revisions in calendar year 2020, accurate compliance is a continually moving target. This is why the simplifications created through the Streamlined Sales Tax Governing Board, a coalition of 24 states that work together to simplify sales and use tax administration, are such a valuable asset to remote sellers.
When the governing board first formed, it drafted the Streamlined Sales and Use Tax Agreement (SSUTA). SSUTA establishes uniform tax definitions and simplified rate and remittance requirements which every member state must follow. In so doing, SSUTA eases compliance for businesses operating within each member state. In addition, SSUTA also created a central, electronic registration system for member states, making the initial step towards compliance far less daunting than before.
For the 24 member states, clear and simple rules create an environment where newly obligated remote sellers are more readily able to comply, which in turn leads to reduced resources needed for administration and enforcement. Lower compliance overhead turns into increased net tax revenue. For example, in member states like Arkansas, West Virginia, and Iowa were up 12.9%, 10.7%, and 10.6%, respectively, in fiscal year 2021 compared to the previous fiscal year.
SSUTA benefits states and meaningfully reduces the costs and compliance headaches for remote sellers. While clarity and simplicity are essential to making compliance manageable and affordable, it’s not enough on its own. This is where tax automation plays an important role.
How Technology Fuels Compliance
Early on, the governing board recognized that many companies were already heavily reliant on technology and automation in meeting their sales tax compliance obligations. They also understood that in the modern era, up-to-date and accurate software tools and services would be the key to compliance. This led to the certified service provider (CSPs) program through which participating tax technology companies are continually certified by the governing board and the SSUTA member states. When a CSP works with a remote seller, the CSP effectively carries out all their sales and use tax functions apart from the self-assessment of consumers’ use tax.
While this might seem like a great way for sellers to overcome the nationwide tax compliance challenge, the combined SSUTA and CSP program only exists within the 24 member states. As such, it’s hardly a cure-all. The fact is the SSUTA hasn’t added a new member state to its roster since Georgia joined in 2010, so it may never be the overarching answer. However, the idea of state certification of tax automation providers definitely has momentum. For example, Pennsylvania created its own CSP program. Illinois is also actively working with the SST CSP’s to get its program off the ground. Connecticut, Missouri, and New Mexico are also actively considering the CSP approach.
Sales tax compliance requirements are not getting simpler. However, utilizing certified tax compliance software and services can greatly ease the burden put on remote sellers. That way, those businesses can focus on daily business operations and keeping their customers satisfied.
Charles Maniace is Vice President of Regulatory Analysis & Design at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos customers continually compliant. Over his 15-year career in tax and regulatory automation, he has provided analysis to the Wall Street Journal, NBC and more.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Charles Maniace is vice president of regulatory analysis and design at Sovos.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.
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