Online Retailers Are Now Tax Collectors

The impacts of the Supreme Court decision are now being felt by ecommerce sellers -- just in time for Black Friday.

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By Charles Maniace • Nov 11, 2018 Originally published Nov 11, 2018

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South Dakota is known for Mount Rushmore, the Black Hills and -- since June -- shaking ecommerce to its core.

The state made internet history in June when it challenged online retailers Wayfair, Overstock and Newegg to collect sales tax despite their lack of physical presence in South Dakota. In taking its case to the Supreme Court and winning, South Dakota reshaped ecommerce taxation.

The Wayfair decision overturned the precedent set by the Quill case, a "90s Supreme Court decision, based on a "60s decision, establishing that retailers didn't have to collect state sales taxes unless they were physically present -- in other words, had people or property -- there.

Related: The Supreme Court's Decision on Online Sales Taxes Will Reshape Retail -- Again

Following the Wayfair decision, states rushed to enforce online sales-tax initiatives of their own. More than 30 states have started requiring retailers to collect sales taxes regardless of physical presence. On Oct. 1 alone, 11 states went live with so-called economic nexus collection requirements and 11 more states are planning to take action by Jan. 1.

Arguably the most important change to taxation in the history of American retail is happening just in time for holiday shopping season.

Big changes for ecommerce retailers come at worst time.

The Wayfair decision won't affect every retailer -- just most. South Dakota's law specifies that small sellers, those with less than $100,000 in statewide sales in the prior or current year, or with fewer than 200 or more transactions with South Dakota customers, do not have to collect. Using South Dakota as a model, other states have set similar thresholds, but they don't necessarily use the same numbers or count numbers in the same way.

That's where things get tricky. If an electronics retailer sells a television and a subwoofer to one customer, does that represent one transaction or two? Likewise, in evaluating whether a business has reached $100,000 in sales, should sales to exempt customers or non-taxable sales for resale count? The rules vary from state to state, assuming states have even considered these questions.

Related: U.S. Supreme Court Decision on Sales Tax Could Be Costly for Emerging Online Businesses

Ecommerce retailers tackling these new requirements face a daunting task. After registering with each state comes the obligation of maintaining state and local tax rates, understanding if products are subject to special exemptions, collecting accurate tax and remitting it on the proper tax return before the deadline. All of this has to happen before holiday shopping season.

That's a challenge. Deloitte predicts online holiday sales will rise between 17 and 22 percent year-over-year in 2018, and online spending will account for a whopping 57 percent of all holiday purchases.

Tax compliance and penalties in a post-Wayfair-ruling world.

Ducking these new requirements isn't an option. States will enforce penalties against ecommerce retailers for not collecting sales tax just as they do for brick-and-mortar retailers.

It takes time to research tax rates, reconcile data, file sales tax returns and prepare for audits. Sixty percent of retailers in a recent Aberdeen Group report cited audit penalties, either from inaccurate or missed sales-tax transactions, as the biggest risk in sales tax compliance. And those are, for the most part, companies with dedicated tax teams. For entrepreneurs with a handful of dedicated employees, the challenge of staying compliant can be overwhelming.

Responding to the Wayfair decision with technology.

Automating sales tax compliance is virtually the only way an ecommerce entrepreneur can be sure to avoid penalties and stay compliant as states create, tweak and enforce sales tax rules.

In its decision, the Supreme Court noted affordable software exists that makes this burden manageable. Most likely, the ready availability of compliance software gave the court assurance that if it eliminated the bright-line physical presence standard it would not throw ecommerce into chaos -- so it did.

As ecommerce companies evaluate compliance options, there are a few important factors to remember. The right solution will be:

  • Accurate, with rates and rules that are constantly monitored for changes, and backed by regulatory expertise
  • Scalable, so it can grow as businesses expand into new states
  • Seamless, offering a single source of truth for tax data stored across systems
  • Connected, linked with other processes such as reporting, remittance and customer exemption certificate management
  • Secure, with internal controls and third-party certifications to protect data
  • Reliable, with a record of uptime and accuracy

Related: How Will the 'Wayfair' Supreme Court Decision Affect Retailers? 5 Ways.

Automating sales tax collection is not a panacea. It takes work to find the right approach, implement it and ensure it works. But doing the due diligence of automating sales-tax collection might be the only way ecommerce entrepreneurs can stay compliant this holiday season, now that South Dakota has rocked the world of online retail.

Charles Maniace

Director of Regulatory Analysis

Chuck Maniace leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos clients continually compliant. Maniace holds a BS in business economics from Bentley College and both a JD and LL.M in taxation from Boston University School of Law.

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