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The growing need to streamline tax compliance

In June 2018, in a 5-4 decision, the U.S. Supreme Court ruled in favor of South Dakota in South Dakota v. Wayfair, Inc. and its decision to allow states to enforce tax collection and remittance requirements against remote sellers. Thanks to the expansion of income tax nexus as a result of the Wayfair case, three years later, every state with a sales tax has enacted rules that mandate sales tax collection for remote sellers. And while states continue to develop their own rules and requirements, one thing is quite clear — managing compliance remains an enormous challenge. With this growing challenge and the need to make nationwide compliance manageable and affordable, this article makes the case for state certification of tax automation providers.

The Wayfair wave

In reaching this decision, the court overturned its prior decision in Quill Corp. v. North Dakota, which required retailers to have a physical presence in a state in order to be required to collect sales tax for sales in that state. This decision stands as a turning point, opening doors to a new era of sales tax and setting off a huge wave of legislation across the country as state governments raced to ride this new public revenue stream. Today, every state with a sales tax has passed their own Wayfair-inspired sales tax laws.

Standing as a landmark case, many states mimicked South Dakota’s remote seller threshold of $100,000 in gross sales or 200 individual transactions. Three years later, this limitation has worn off as each state now looks to set its own threshold that would bring out-of-state sellers into compliance without negatively impacting the system. The varying regulations from state to state have left us with a patchwork of measuring periods, revenue amounts and transaction count triggers.

Showcasing how subtle the distinctions can be, consider the following examples:

  • North Dakota law requires remote sellers to collect North Dakota sales and use tax on their sales into the state unless they meet the Small Seller Exception, which will require sales tax collection by remote sellers “only if” their taxable sales into the state exceed $100,000 in the current or previous calendar year.
  • In Colorado, any retailer who does not maintain a physical location in the state is exempted from state sales tax licensing and collection requirements if the retail sales of tangible personal property, commodities and/or services made annually by the retailer into Colorado in both the current and previous calendar years are less than $100,000. The retailer must begin collecting sales tax if its retail sales into Colorado during the current calendar year exceed $100,000.
  • In Tennessee, if an out-of-state dealer has no physical presence in the state and meets the $500,000 threshold, it is required to register and begin collecting sales and use tax on the “first day of the third month” following the month in which it meets the threshold.

Adding a layer to the above examples, states also differ as to whether sales made through online third-party marketplaces count against the thresholds. A majority of states hold that once you cross the threshold, the requirement to become compliant takes effect immediately. The reality is, remote sellers must accurately track their economic activity to understand where and when they must start registering, collecting and remitting tax.

Streamlining sales tax for remote sellers

Along with collecting and remitting tax comes the demand for navigating the patchwork of rates, taxability rules and filing requirements. But this is no easy feat — with more than 640 rate changes since this time last year and 657 form revisions in calendar year 2020. This is where the Streamlined Sales Tax Governing Board comes into play for remote sellers. A coalition of 24 state governments, the SSTGB works together to modernize and simplify sales and use tax administration. The outcome of their labor is the Streamlined Sales and Use Tax Agreement.

Every SSTGB member must adhere to the SSUTA, a set of uniform, foundational principles that streamline sales tax procedure. Local governments have craved a way to streamline compliance, and SSUTA stands in that gap. SSUTA established uniform tax definitions, simplifying tax rates and remittances, establishing a central, electronic registration system for member states and mandating state-level administration of local sales taxes.

For these 24 member states, efficient sales tax compliance means sellers may be more readily able to comply, which in turn leads to reduced resources needed for administration and enforcement. Alternatively, lower compliance overhead turns into increased net tax revenue. For example, let’s look at sales and use tax revenue in Arkansas, West Virginia and Iowa. These SST member states were up 12.9%, 10.7% and 10.6%, respectively, in fiscal year 2021 compared to fiscal year 2020.

Looking beyond the benefits SSUTA brings to states, it also reduces the costs and compliance headaches for remote sellers. Clarity and simplicity are both keys to making compliance manageable and affordable, but it's not enough on its own. This is where tax automation takes center stage.

Technology’s key role in compliance

The digital landscape is expanding rapidly. Recognizing this, the SSTGB predicted early on that most companies would become compliant through software tools and services. They also acknowledged that if the technology providers curating and supplying this software understood the compliance requirements, then so would their customers. As a result of this thinking, the certified service provider program was created. A CSP is an agent that is continually certified as accurate under the SSTGB and the SSUTA member states. When working 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.

But don’t be fooled. This is not to be confused with a nationwide cure-all to compliance complexity. The combination of SSUTA and CSP programs only exists within the 24 member states, and the SSUTA hasn’t expanded its membership roster since Georgia joined in 2010. However, since the Wayfair decision, other states have started implementing independent CSP-like programs, with Pennsylvania being the first to create its own CSP program. Illinois is actively working with the SST CSP’s to get their program off the ground. Connecticut, Missouri and New Mexico are also actively considering the CSP approach.

The sales tax compliance landscape has evolved dramatically over the past three years, largely due to the internet and the growing digital environment. Accommodations must be made for changing times and the complicated world of compliance.

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