SALES AND USE TAX BURDENS IN A POST WAYFAIR ENVIRONMENT
The far-reaching impacts of COVID-19 have touched all aspects of our lives, including the ways we shop. Consumers are shifting toward more online shopping and a new trend has emerged—online shopping with in-person pickup, something that was rarely seen pre-pandemic. How businesses evolve to meet the shift in consumer demand may have sales tax consequences.
PANDEMIC IMPACTS TO CONSUMER BEHAVIOR
After almost two years the pandemic remains a primary force of change in the global economy. Early in 2020, businesses were forced to rethink their strategies as new regulations and mandatory restrictions came into effect, changing the economic landscape. Today, supply chain challenges and labor shortages continue to challenge businesses and evolve consumer behavior. Perhaps the largest pandemic-related impact to consumer trends has been the shift to e-commerce, with many consumers altering their spending habits in favor of the safety and convenience of shopping online.
From the start, the pandemic had immediate impacts for state and local governments that continue to this day. Early on, many states were uncertain of how the pandemic would affect revenues as relief measures became the primary focus. Now, many states are seeing noteworthy growth in sales tax revenues, with many seeing double-digit growth according to government data. Reasons vary from state to state, but, in general, there has been an uptick in consumer spending and additional revenues from remote sellers—which are being collected in states via economic nexus and marketplace facilitator laws.
From changes in consumer behavior with the pandemic and evolving state government response, how a business plans to meet these challenges is important. Here are a few noted trends that will impact sales tax in the year to come and beyond.
THE EXPANSION OF ECONOMIC NEXUS
It has been over three years since the Supreme Court decision in South Dakota v. Wayfair, Inc., which made it possible for states to enforce economic nexus. In 2021, the final pieces of the economic nexus puzzle fell into place when Florida and Missouri enacted their own nexus standards. While Missouri’s laws do not take effect until 2023, as of today, all 45 states that have sales tax regimes have adopted economic nexus thresholds. Each state enacting laws with varying threshold limits and calculation rules.
Since that historic decision, e-commerce has significantly increased as consumer behavior has shifted in favor of online sales, in no small part due to the impacts of the pandemic.
The timing of these historic events and state adoption of economic nexus laws are set to create a myriad of complexities and new liabilities for businesses engaging in online sales. Because many businesses either increased their online activity or engaged in online sales for the first time in the past three years, there is a very strong chance businesses have already triggered sales tax obligations in new states. The list of states businesses will have sales tax obligations to will only increase as the trend for growing online sales continues in 2022.
Businesses that adjust to meet consumer demand by expanding into new online sales channels will need to be mindful of the sales tax requirements this expansion will bring.
It will be especially important for remote sellers and multi-channel sellers to understand the complexities of meeting economic nexus thresholds and the registration and reporting requirements that come with exceeding these thresholds. As an increase in enforcement of economic nexus is highly likely in the coming years, businesses must prepare to get registered in states, collect the correct amount of tax, and to file required returns.
Now that many states are seeing budget surpluses, some are reducing other tax types—like corporate and income taxes. Jurisdictions that reduce certain streams of revenue become more reliant on others, leaving many states looking to sales taxes to fill coffers. Increased reliance on sales tax combining with the new opportunity for states to gain revenues from remote sellers will lead the way to increased enforcement activities and create an urgent need for many businesses to examine their sales tax compliance.
With the ubiquitous presence of online marketplaces—from the start of eBay to retail giants such as Amazon— it is no surprise that marketplace facilitator laws have developed hand-in-hand with economic nexus laws. All states that impose a sales tax now have some form of marketplace facilitator laws.
Adoption of marketplace facilitator laws for states makes sense as e-commerce has become a staple for consumers. Because these laws put the burden of collection on the marketplace provider, states can easily tap an enormous market. The cost of enforcement is also reduced when a state needs only engage with one responsible entity, rather than track down potentially thousands of individual sellers. Most marketplace facilitator laws generally place reporting requirements on marketplace providers. However, this may not completely remove the burden of registration and reporting requirements from marketplace sellers in all states.
If your business is a multi-channel seller, and you make direct sales and sales through a marketplace provider, you need to know whether a state requires marketplace sales to be included when calculating economic nexus thresholds.
There may also be registration requirements for marketplace sellers. Some states, such as Nebraska, require marketplace sellers who meet economic nexus to register and report all sales even if the marketplace provider is collecting and remitting the tax due.
With all the intricacies and variance among states’ laws surrounding who is liable for tax on sales through a marketplace provider, many legal cases have been initiated to challenge these laws. The California Department of Tax and Fee Administration was sued by the Online Merchants Guild for holding Amazon sellers liable for back sales tax. While that motion failed in federal court, it is not likely to be the last of such litigation we will see in the future.
Along with the growth in business engaging in e-commerce, there has been a significant growth in businesses engaging in multi-channel commerce. Businesses are finding advantages in supplementing brick and mortar sales with the ease of setting up a sellers account through marketplace providers, such as Amazon, or placing products for sale on social media platforms like Facebook Marketplace. Even creating your own online storefront has become much easier with services like Squarespace, where you no longer need any programing skills to create a webpage. Commerce is happening anywhere and everywhere. The growth of multi-channel sales is good for both businesses and consumers alike as it creates more opportunities for businesses to reach new customers, as well as making it easier for consumers to find products that otherwise would not be available in their market. However, with added opportunity comes added complexity.
Services like curbside delivery and store pickup have recently become popular due to the amount of convenience they offer. —Allowing customers to make purchases online and pick up their purchase at a physical store, often not even having to leave the comfort of their vehicle. This creates an additional sales tax complexity because online retail systems often calculate tax based on a customers’ shipping address. However, if a customer picks up their purchase at the store, the sale should be sourced to the location of the store. Depending on the state, the rates could vary between the two locations.
WE WELCOME YOUR QUESTIONS
2022 looks to be a year that puts a renewed focus on sales tax, especially for remote sellers. As we put the first quarter of the year behind us, we look forward to keeping you informed of other trends in sales tax policy and enforcement that will likely develop and how to best address them. Please reach out to the trusted advisors of REDW’s state and local tax team with any questions.