The Post-Wayfair Path to Tax Compliance for eCommerce Sellers

Charles Maniace
December 13, 2018

In the wake of the South Dakota v Wayfair Supreme Court decision, and new sales tax nexus rules taking effect across the United States, I wanted to share some thoughts about what ecommerce sellers should be thinking about with respect to registering and meeting ongoing tax compliance obligations in potentially dozens of new states.

The full video presentation from the November Meet Magento New York Conference is embedded below.

While states have been moving to enact remote collection rules since the Supreme Court decision in June, the pace and rate of this change seriously picked up in the fall. For example, on October 1, 11 more states went live with economic nexus rules similar but not necessarily identical to those in South Dakota. So if you sell ecommerce into any of these states, even though you’re not physically present, you have an obligation to collect tax. In November, states such as New Jersey, North Carolina, South Carolina and South Dakota all went live with economic nexus collection requirements and just a couple weeks ago, Colorado and Connecticut both had effective economic nexus dates go live. [Postscript – Colorado has since provided a compliance grace period extending until June 1, 2019]

As we head into 2019, the rest of the states that haven’t done anything will likely so something soon. Essentially what ecommerce sellers are facing is a situation where they’re going to have a tax collection and remittance liability in a majority if not all of the states that impose sales tax as soon as the early part of next year. [Postscript – On December 11, California announced a plan to tax remote commerce effective April 1, 2019]

What Should eCommerce Sellers Do to Prepare for Economic Nexus?

  1. First of all, you need to think about how you’re going to register in all these states. Be prepared, in registering for sales tax, states are known to ask some pretty intrusive questions.
  2. Before you start collecting – think about how you are going to manage your filing and remittance obligation. The simple act of completing a sales tax return incorrectly or filing it late is a sure path to penalty assessments. Further, be prepared to remit any sales tax you collect. The worst thing you can do as a seller from a sales tax perspective is to collect tax and then not remit it to the government, essentially committing tax fraud.

With respect to filing – it’s not easy and filing is getting harder. In a number of states, we have seen a trend towards requiring a highly granular reporting of exempt and specially taxed sales. Meaning certain sales are reported in certain boxes, and if you don’t do it correctly, you are subject to penalty.

Fortunately, ecommerce sellers are sometimes afforded simplification options. For
example, in most states that are members of the Streamlined Sales Tax Initiative, and there are 24 of them, you can file the simplified electronic return. It’s a far simpler sales tax filing than the
standard sales tax filing, like seven or eight boxes. It’s really easy.

Alabama, Louisiana, and Colorado are some of the hardest states to collect and file in. They all have simplifications for filing that are part of their approach to taxing ecommerce. So be on the lookout for where you can take advantage of filing simplifications.

Selecting a Sales Tax Software Solution to Manage Economic Nexus

In its decision, the Supreme Court said that there are affordable and manageable tax compliance solutions out there, and I have to think that the five justices that decided to overturn Quill, in the back of their minds, knew that technology made nationwide tax compliance possible for ecommerce sellers without causing chaos.

When you look for a sales tax software solution, ask these questions:

  1. Is it sound? Meaning comprehensive, fast and secure.
  2. Is it backed by a team of people who know sales tax and keep the solution up-to-date as rates and rules change?
  3. Does it collect and remit tax in all the jurisdictions you are in today and all the jurisdictions you’re going to be in tomorrow?
  4. Does it support the products you sell, because what you sell may be taxed or exempted
    depending on state law.
  5. Is it scalable? Can you easily integrate a filing solution or an exemption certificate management solution into the tax determination engine?

It’s extremely likely that the requirement of remote collection is here to stay. While some may be holding out hope of congressional intervention, the fact is that Congress had 20-30 years to address ecommerce taxation and they chose not to act. While the political climate is always subject to change, there are no strong indications stemming from Washington that this Congress, or the new Congress convening in 2019, will enact legislation that in any way limits the impact of the Wayfair decision.

Marketplace Facilitator Laws Post-Wayfair

In conjunction with enacting these laws, a lot of states are also enacting marketplace facilitator
laws. These laws look to consolidate sales tax. If you sell through a marketplace, it may be the marketplace that has the obligation to collect and remit tax for you, but what’s not clear
is how that’s going to work. Here are some questions to ask:

  • Can I separate marketplace sales from sales that happen over my own website?
  • Will I be able to know which transactions a marketplace collected (and did not collect) tax for me?
  • Under a given state marketplace rule, do I report (as exempt) or entirely disregard marketplace sales for tax filing purposes?
  • Do I need to track if the marketplace is collecting correctly – If the marketplace gets it wrong, do I have potential audit exposure and possible liability for penalty and interest?

How marketplace rules will ultimately impact the tax compliance landscape is unclear. However we know from talking to state regulators there is a lot of enthusiasm for marketplace facilitator rules because they make sales tax simple, especially for the regulators. So I suspect we’re going to see more Marketplace-related statutes enacted by states over the next year. Hopefully, and as a provider, we’re working to help make this happen, states will provide the necessary clarity to make these requirements manageable for both the sellers and the marketplaces.

States with, or about to enforce marketplace rules

See timestamp 14:20 in the video below for details on the following:

  • Alabama
  • Arizona
  • Connecticut
  • Indiana
  • Iowa
  • Minnesota
  • New Jersey
  • Oklahoma
  • Pennsylvania
  • Rhode Island
  • South Dakota
  • Washington

Are sellers outside the United States required to comply with remote seller nexus law?

The short answer is yes. Now, whether there’s a practical ability to enforce or to collect this tax from non-U.S. sellers remains unclear. However, when thinking about risk, don’t just think pure numbers and don’t just think about your company as it exists today. Rather, also consider:

  • Your reputation risk
  • Where you might plan to expand later. Would you want to move or open up a warehouse or a distribution center in a state that considers you a tax cheat or already has levied tax penalties against you?

For the Q&A portion, fast forward to timestamp 16:00, or review the entire presentation, below:

 

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Author

Charles Maniace

Charles Maniace is Vice President – Regulatory Analysis & Design at Sovos. An attorney by trade, Chuck leads a team of attorneys responsible for all the tax and regulatory content that keeps Sovos clients continually compliant. Over his 14 year career in tax and regulatory automation, he has given talks and presentations on a variety of topics including The Taxation of High Tech Transactions, The Taxation of Remote Commerce, The Regulatory Implications of Brexit, The Rise of E-Audits, Form 1042-S Best Practices and Penalty Abatement Practices for Information Returns. Chuck is a member of the Massachusetts Bar and holds a B.S. in Business Economics from Bentley College, a J.D. from Boston University School of Law, and an LL.M in Taxation from Boston University School of Law.
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