States sales tax automation software will likely become a critical part of your technology suite by the end of 2020. The first six months of the year turned out to be a more tumultuous and complex time than many in recent history, and state governments and businesses across the US have faced huge economic shifts. Ecommerce and remote sales are keeping the retail and food service markets alive (and in some cases, growing them exponentially), while local municipalities and states have to make desperate decisions on public services and funding.
Sales and use taxes take on a whole new dimension for state government in a crisis such as the coronavirus pandemic, but this is only part of the bigger picture. Staggered investment in IT infrastructure throughout the country has exposed the strengths of remote work availability, and the weakness of the lack thereof; there is a huge gap between those thriving in the new normal and those not. The combination of state economic nexus and COVID-19 will fundamentally change tax collection in the near future, as well as create long-term impact and shifts that only sales tax automation will be able to solve with ROI.
Here are five reasons why your business will need sales tax automation with Avalara in 2020:
COVID-19 Creates A New Impetus for Remote Sales Tax Revenue
Many, if not most, states have had their economies hit hard by COVID-19, between the deaths, panic, tensions, shutdowns and social distancing requirements. Quite a few local governments are projected to lose millions in tax revenue at a time when social services are stretched to the limit providing support and relief to the largest number of unemployed Americans in history. Quite a few states have still been playing catch-up with the switch to economic nexus and remote sales tax, and so were not prepared for the shift in consumer spending.
Ecommerce accounts for a significant portion of business across the US now, and those governments that have not been aggressive about collecting revenue on those transactions now have a reason to be. With digital sales facilitated through multiple remote sellers – from big retailers like Amazons to SMB distributors – accounting for a bigger fraction of local economies, states are going to lose even more desperately needed income. South Dakota v. Wayfair already provides the justification for states to treat online commerce like other taxable revenue, so businesses should be prepared for new tax rules addressing those shortfalls.
2020 Was the Year of National Economic Nexus
By January 1, 2020, 43 US states had implemented economic nexus tax regulations, and 39 of those also had marketplace facilitator sales tax laws in place. While there is a noticeable divide in how states have implemented or planned to implement tax nexus laws, the end result was that most of the country began to treat ecommerce sales like brick and mortar business transactions. This adoption has happened in waves, from late 2019 to April 2020, with the stragglers setting final compliance deadlines for July 2020.
The idea of economic tax nexus establishes that states are losing out on revenue that would have otherwise been taxable if the whole sales cycle happened physically in their jurisdiction. Despite the differences in opinion in how strict these new collection measures should be, most state governments seemed to agree that ecommerce account for a growing portion of their local economy, if not outright replacing brick and mortar transactions in some areas. While COVID-19 may have disrupted the implementation of these laws, it certainly has not stopped the final wave – it will be safer to assume that the states you do business in have a remote sales tax requirement than not.
Learn about the changes to tax codes in your state. Download the Avalara 2020 Sales Tax Report below:
Tax Filing Deadlines, Exemptions, Thresholds and Relief
The intersection of economic nexus and the coronavirus pandemic creates something of a “perfect storm” for state tax regulations. The crisis came just at the time these new rules were seeing widescale adoption, and state and municipal governments were getting a sense of how and when to enforce them. Plenty of major economic centers already had to rethink certain details a few times, namely expected sales thresholds and exemptions for nexus compliance.
The economic disruption caused by COVID-19 has led to a brand new surge of legislation that add even more asterisks to your business’s tax obligations. There are many complexities surrounding the touchpoints where you qualify to be taxed and where you qualify for relief. The shifting deadlines certainly do not help, and it can be very hard to keep track of all this information (but expensive if you don’t keep track of it).
Auditing, Penalties and State Tax Interest
All the changing filing dates, ecommerce sale threshold levels, potential exempts and incoming tax relief benefits can obfuscate the other side of complex regulatory obligations – noncompliance penalties. Without persistent, professional tax auditing capabilities available on-demand (for every one of your transactions), you can face penalization for items you did not even know you were obliged to. This can range from unpaid remote sales taxes to misusing relief benefits if you are not careful.
Worse, some unpaid tax obligations can collect interest, meaning you will have to pay even more for noncompliance. Unaudited tax requirements can end up costing your business significant amounts before you are even aware they exist. With all the new and upcoming changes to regulatory enforcement, that could happen easier and more quickly than you think.
The New Normal and Sales Tax Collection Post-Coronavirus
The new normal is transforming what was already a rapidly evolving marketplace, and in spite of the worldwide pandemic, that is not entirely a coincidence. There were increasing investments in digital technology infrastructures going back several years, and the coronavirus shutdowns only reinforced the need for that transition. Now, of course, tax regulations have to catch up with the reality that a lot of business and work will be conducted remotely, including across state lines and even international borders.
This creates post-coronavirus tax implications – distributed supply chains, employees working from home, and all the other aspects of digital transformation changes the traditional economic models states have relied on, as mentioned before. However, the impact of these trends will be magnified by the loss of physical business during COVID-19. The pandemic’s fallout will make clear to every municipality and state how the new normal will affect their tax collection, and laws will undoubtedly have to change to meet this emerging reality.
Learn More About the Impact of COVID-19 on Tax Policy
While economic nexus was already transforming the sales tax landscape, the coronavirus pandemic has virtually turned it upside down with amount of new regulation that needed to be introduced. There are too many new requirements and possible exemptions to list here – discover the rest by attending our webinar.
Register for SWK’s webinar here to learn the total impact of COVID-19 on sales tax policy for ecommerce.