If your business sells across US state lines, then be prepared for new sales tax charges. As of October 1, 2019, a majority of US states have begun enforcing “economic nexus” sales tax law updates established by the landmark Supreme Court decision in South Dakota v. Wayfair, Inc. This case introduced a legal obligation for remote sellers to collect tax on all sales according to the regulations of the state the purchase resides in.
These law changes introduce a whole host of new compliance requirements not only for state taxes on remote sales, but also for franchise, marketplace facilitator and even potential overseas sales taxes. More importantly, your business will now have to adjust for tax reporting for all states implementing economic nexus sales models. Unless you deploy a solution for automating sales tax reporting compliance, your accounting processes will get bogged down in tedious manual entry and checking.
Here are the most important updates to sales tax to expect by 2020, and how you can best address the pain points they will cause:
What is Economic Nexus?
The most basic definition of an economic nexus, at least it applies to a US state, is the meeting point between a consumer purchase and the legal and economic interest of that state to impose a tax on that sale. Essentially, sales that are facilitated in a state’s jurisdiction can be taxed to benefit that state’s investment in the local economy. However, business done between states was historically seen as outside of economic nexus and previous legal cases set a precedent for such tax levies to be unconstitutional.
South Dakota v. Wayfair Supreme Court Ruling
South Dakota v. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. was a landmark case that completely reversed the previous stance on economic nexus in the face of Internet-enabled sales. E-commerce, the Supreme Court argued, had the changed nature of business and existing laws were depriving US states of tax revenue that would otherwise be collected from physical sales. The Court had been leaning towards this decision for some time and has only solidified its position since the final ruling in June 2018.
States Imposing Economic Nexus Taxes Before Oct.1 2019
A total of 21 states changed sales tax reporting requirements in response to Wayfair, though a few extended deadlines after some false starts and other complications. New York stands out as the only one to begin immediate enforcement due to existing local laws that were previously overruled by federal regulations. However, the state has not done the best job in communicating requirements and deadlines, and like many other jurisdictions has had to adjust the threshold for small sellers.
The small seller threshold was introduced by the originator of the law, South Dakota, to ensure that interstate commerce would not be disrupted at the expense of smaller businesses. This has taken the form of either sales or transactions ceilings, or both, but multiple states have had to amend these repeatedly, or otherwise push back deadlines. As of October 1, 2019, most states that implemented sales tax changes early have some form of economic nexus requirement in place, but with various local stipulations and exemptions.
State Imposing New Sales Tax Laws 2019-2020
Most states that did not introduce or finalize economic nexus tax laws before October 1 have either done so since, or plan to do so by 2020. These include Arizona, Kansas, Maryland, Massachusetts, Minnesota, Tennessee, and Texas. Some state legislatures that have not introduced definitive measures have expressed interest in seeking modified versions or alternatives within the next year, including Pennsylvania and Kentucky.
Even states that have been hesitant to jump feet first into the economic nexus trend have still shown a motivation to pursue universal state tax standards. Existing regulations such as the Streamlined Sales and Use Tax Agreement provide a precedent for unifying interstate tax codes, so that even states that do not fully embrace the changes may still mirror some elements to unify requirements nationally.
Marketplace Facilitator Taxes
Perhaps the best example of a “marketplace facilitator” is Amazon – the e-commerce giant acts an online platform that allows smaller retailers to extend their reach internationally. Before Wayfair, Amazon avoided sales tax, but it was determined that this created an unfair competitive advantage over local businesses. To correct this, Amazon and other online marketplaces are now forced to collect state taxes on every sale made by third party sellers.
There are several important factors to note on marketplace facilitator sales tax regulations, including that small seller sales and/or transaction thresholds may often be lower than those for independent retailers. These transactions include their own jurisdictional variations as well, which can change for both the state of the sale and the state you are based in.
Learn How to Adapt to Economic Nexus Before It’s Too Late
These are only a fraction of the individual terms and conditions included in each state’s approach to economic nexus compliance, and even may these be altered further (some are guaranteed to). Getting a handle on new sales tax reporting requirements will mean discovering which apply to your business and finding the best way to streamline your tax compliance processes.
Download the Mid-Year Sales Tax Update report by Avalara to learn more about economic nexus and what changes you should be prepared for.