As COVID-19 Changes the Retail Landscape, are SMBs Ready for the Sales Tax Ramifications?

Charles Maniace
April 10, 2020

The COVID-19 pandemic has dramatically changed the way in which commerce is conducted in the United States and around the world. Based on current restrictions, consumers have had no other choice but to explore e-commerce options to fulfill needs for all but the most essential items and services.

In turn, smaller and mid-sized businesses that maybe had a small online presence before the outbreak have been ramping up efforts to fulfill orders and maintain cash flow during a period of forced closure. While online sales have provided an excellent way for them to keep the businesses operating in the near-term, there may be some longer-term ramifications that they may be unaware of or unprepared to manage.

E-commerce has been steadily on the rise since the early 1990’s, according to the U.S. Department of Commerce, consumers spent $601.75 billion online with U.S. merchants in 2019, up 14.9% from $523.64 billion in 2018. Before the onset of COVID-19 many estimates had predicted that more than 230 million U.S. consumers would be expected to be shopping online by 2021. Based on current circumstances, we can only project that the number of shoppers and the amount they spend in 2020 will be considerably higher than anticipated.

Here is where the complexity for many businesses unfamiliar with the sales tax ramifications of expanded e-commerce activity comes into play. It used to be that a business needed to have a physical presence in a state to demand that a business collect and remit sales tax. Under the old rules, many small to mid-size businesses who had no connection with a state other than the fact they were shipping orders to in-state customers, had no sales tax collection and remittance obligations.

However, that all changed on June 21, 2018, when the United States Supreme Court ruling in South Dakota v. Wayfair. The decision granted states the authority to mandate that businesses collect, and remit sales taxes based solely on economic activity, so long as the requirement did not represent an “undue burden. “

This decision vastly expanded what constitutes nexus for business. Nexus is no longer solely determined by your physical presence in a state. Your nexus obligations can now also be based on the sales revenue and transaction volume you generate in each state, regardless of your physical presence. This ruling established a massive opportunity for states to generate revenue and one that they are taking full advantage of, including the use of technology to enable aggressive enforcement. Today, virtually every state that imposes a sales tax (except for Missouri and Florida) has changed their law to capture e-commerce sellers, with many sates defining what constitutes economic nexus a little differently. In most states, it doesn’t take much. For example, many jurisdictions will begin imposing tax obligations on a seller if they have more than 200 transactions or $100,000 in gross sales to customers in their state.

Today’s circumstances have created many newly minted e-commerce companies to meet the demand for non-essential goods and to keep revenue streams moving. As a result, the number of companies crossing nexus thresholds for states is expected to sharply spike. While states have been adjusting remittance and filing obligations to provide relief in the short-term, re-establishing sources of revenue will be a priority for all governments once normalcy returns.

This means sellers will be held accountable for tax compliance at some point. Understanding the rules and your organizations obligations thereunder is a critical step in keeping your company safe. The last thing you need at this point is an extended and costly audit leading to a major assessment including penalties and interest.

Take Action

For those already collecting and remitting sales tax, Sovos is tracking all of the COVID-19 driven sales tax changes. Find out how from our experts.

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Author

Charles Maniace

Chuck is Vice President –Regulatory Analysis & Design at Sovos, a global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, he leads a team of attorneys and tax professionals that provide the tax and regulatory content that keeps Sovos customers continually compliant. Over his 20-year career in tax and regulatory automation, he has provided analysis to the Wall Street Journal, NBC, Bloomberg and more. Chuck has also been named to the Accounting Today list of Top 100 Most Influential People four times.
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