Tax laws, particularly those regulating e-Commerce and sales tax, have suddenly become a lot more complicated. Last year’s Supreme Court decision on South Dakota v. Wayfair, Inc. changed the entire landscape of sales tax regulations. Changes in the interpretation of nexus have caught many online businesses by surprise; physical presence is no longer the only consideration when determining nexus.
E-Commerce sellers can have nexus with a state by simply selling into that state. The Court ruled that states can force online retailers to collect sales tax, regardless of the company’s physical location. And if they don’t collect sales tax from their customers, the burden to pay the tax falls on the seller, along with any penalties and interest the state may assess. Consequently, many retailers are realizing, sometimes too late, that their tax exposure is far greater than they thought. Even companies large enough to have their own in-house tax teams often find it hard to keep up with or prepare for the rapidly changing regulations. Startups and those companies that have experienced dramatic growth are particularly vulnerable.
Quick story problem: You own an e-Commerce company that grossed $5 million last year. With sales tax at a nationwide average of 6%-8%, what’s your sales tax liability? Easy, $300,000 to $400,000. But in which states should you file? Did you collect sales tax from customers in those states? If you haven’t been, your customer’s tax burden may become your tax burden. Audits will surely uncover the missing funds. And if you haven’t been keeping track of the changes in the sales tax regulations and correctly filing with every state in which you do business, you could be liable for sales tax for every year as far back as you’ve been in business, as well as penalties and interest! All of a sudden, that initial $300,000–$400,000 sales tax liability may have grown exponentially and put your business at risk.
Unfortunately, trying to keep an eye on state sales tax regulations leaves many retailers stumbling in the dark. Thanks to Wayfair, states not only set their own regulations regarding sales tax collection, they can also set when those regulations go into effect. Keep in mind there are no set schedules; states can change these regulations whenever they want, and states that don’t have regulations currently can implement them without warning. Here are a few examples from 2018:
● In November, Colorado began requiring online retailers to obtain a state sales tax license;
● Massachusetts announced that the state will officially begin enforcing its post-Wayfair regulations for all online retailers;
● Nevada passed a law to adopt the $100,000 in sales or 200 transaction threshold; and
● Illinois announced expanded regulations that went live in October.
These are just a few examples of the types of rules and regulations that were enacted at a dizzying rate in 2018. Luckily, there are steps retailers can take to reduce their sales tax exposure and potential for government audits and fines. Consider the following:
- Know your risk. Assess where you are right now. This includes knowing what goods and services are taxable, where they are taxed and what the regulations are for each state where you have a customer. Knowing state by state what is taxable and what isn’t is critical. This includes services, because now services can also be taxed. For example, SaaS subscriptions will soon be taxable in 25 states.
- Watch for changes. Keep track of existing sales tax regulations, and keep an eye on the states that haven’t yet formalized their sales tax laws. You might want to consider hiring someone who already monitors these regulations.
- Resolve existing liabilities. If your company hasn’t kept up with the changing legislation, you could owe a lot of money. When problems are found, whether or not there is a formal audit, you need to understand your options, whether it’s working out a deal with the state or negotiating voluntary disclosure agreements.
- Invest in technology and processes. If you don’t have a sales tax plug-in for your accounting software, get one. This will take time to set up, so don’t put it off. You will also need to ensure that your sales tax plug-ins are updated to accommodate the latest changes, for example, turning on nexus for each state, ensuring products are accurately coded, checking that any new products being launched are in the system, and so on.
- Launch a “Wayfair” (aka Economic Nexus) review. Doing what you did last year just won’t work. A company we worked with in 2018 said they’d traditionally been filing in five states. With Wayfair, and because of the states’ updated economic nexus standards, it turned out they needed to be filing in 32 states! That’s quite a difference. Don’t forget that doing this wrong could cost you 6%-8% of your bottom line.
- Don’t be afraid to ask for help. Contact a tax advisor experienced in Wayfair legislation. They can help you identify your sales tax exposure and risk, which includes identifying the states where you have the highest exposure and how to minimize that risk.
Bottom line: Failing to collect sales tax according to each state’s sales tax regulations can be devastating, and wishing it would all go away isn’t an option. Remember our story problem above? Don’t let Wayfair ruin the chance of a happy ending to your company’s fiscal year.
Stephen Day is a Principal at VPTax. He has nearly 30 years of corporate tax experience. Day began his career in Arthur Andersen’s State and Local Tax practice. He is a CPA and has worked in consultancy as well as in in-house roles at the highest levels for publicly traded companies and the “Big 4.” He is now enjoying the new challenge of serving as a “fractional tax director” for many online retailers and SaaS companies.