Online retailers have had to contend with year after year of changes in the ecommerce tax landscape. After the landmark 2018 Wayfair decision that allowed states to require sellers to collect sales tax regardless of whether or not they have a physical presence in the state, the situation has continued to be tricky for ecommerce businesses. Plus, with COVID amplifying the importance of ecommerce and remote staffing, tax rules continue to evolve.
That’s why Avalara, the leading tax compliance software, held a live virtual event to discuss the ins and outs of how this year’s changing tax policies and trends will affect real businesses. We tuned in to find the top four takeaways for online retailers looking to ensure their business is complying with all the rules and staying on top of the latest changes.
All States with Sales Tax Now Have Economic Nexus Laws
“The last dominoes fall,” proclaimed Avalara. After Wayfair ruled that economic nexus laws could be on the books, it only took a few years for every state (that collects sales tax) to write their own.
Here’s a quick refresher: Economic nexus laws allow states to impose sales tax on remote sellers who sell over a certain threshold. Avalara explains, “Economic nexus is triggered by reaching a certain amount of sales (e.g., $100,000) and/or a number of sales transactions (e.g., 200 transactions) in another state. If you trigger nexus in a state, you need to register to collect and remit sales tax there.”
Now the only states without nexus laws on the books are the four states that charge zero sales tax: Delaware, Montana, New Hampshire, and Oregon. (Alaska does not charge statewide sales tax, but some local governments in Alaska do. Confusing, right?)
Now that every sales tax state has nexus laws, you’d think that would make things easier for online retailers, right? Not quite. Economic nexus laws are different in every state. That puts more pressure on ecommerce businesses to track their sales across the country.
Marketplace Facilitator Laws Are in Flux
Just like nexus laws, all states with sales tax now have marketplace facilitator laws as well. These laws make marketplace facilitators (like Amazon, eBay, and Walmart) “responsible for collecting and remitting sales tax on behalf of their third-party sellers in addition to collecting and remitting for their direct sales,” Avalara explains. Think of it like shifting the responsibility to collect sales tax from the seller to the platform where the sale is occurring.
In 2021, Kansas, Florida, and Missouri enacted marketplace facilitator laws, meaning that the grand total is now 45 states. These include all the states with a sales tax, plus Puerto Rico, Washington D.C., and some local Alaskan governments.
Marketplace sellers should be on the lookout for ways they might be meeting a state’s physical or economic nexus without realizing it. For example, you might have a physical nexus in a state if you’re storing inventory in a warehouse there. The more spread out your business becomes, the more you have to pay attention to tax compliance across states.
>>Want to learn more? The tax experts at Avalara have developed its most comprehensive tax changes report to date.
BOPIS Complicates Tax Rules
In a post-pandemic world, BOPIS is king. Buy online, pick up in store (BOPIS) was (and remains) the answer to pandemic-era shoppers who wanted the ease of shopping locally without having to enter a store. But this consumer-friendly shopping experience can be a thorny one for tax compliance.
As Avalara points out, “Ecommerce systems are often set up to calculate tax based on customers’ shipping and/or billing address. Yet if a customer collects the goods at the store, tax should be based on the rate in effect at that store.” That’s right: Even if the sale was made online, the tax should be collected based on the rate at the store where the customer picks up the item.
To complicate matters further, the difference between the two rates can vary across states. (Sound familiar?) Avalara cites a few examples: “Some states (e.g. Maryland) don’t levy local sales tax, and in states that do, a customer could reside in the same sales tax jurisdiction as the store. But it’s also possible for a customer and retailer to be in different jurisdictions. Missouri and Colorado are two states where buildings located across the street from one another can have different rates due to overlapping sales and use tax jurisdictions.”
Buy Now, Pay Later… But When to Pay Taxes?
BNPL has been virtually an overnight success story. But retailers must understand how these payment plans affect sales tax. Imagine you have a consumer who buys an item that retails for $100 but selects a plan for 4 installments of $25. Consider the following sales tax options:
- The consumer pays the full tax on the $100 purchase at the time of the initial sale.
- The consumer pays a percentage of sales tax on each installment of $25.
Which one do you think is correct? Actually, they both are, depending on the state in which the sale is made. (Surprised? Didn’t think so.) Even though the lump sum of the sales tax is the same, paying that extra sales tax upfront can make a huge difference in customer experience.
Another question retailers should ask is whether or not the fees associated with BNPL services are subject to sales tax. In the retail breakout session, Jeffrey Lutters, Avalara’s senior manager of production solution engineering, cites his home state of Washington, where the tax on the fees is due when the customer receives the item—neither when the sale is made, nor when the item is paid in full.
Tax Automation Removes the Compliance Burden
If all of these tax changes have your head spinning, rest assured that there’s an easier way to ensure your business is compliant. Webgility integrates with Avalara Avatax to automatically calculate, validate, and track your ecommerce sales tax. By partnering with Avalara, Webgility’s Modern Commerce Workspace™ helps businesses using QuickBooks get tax compliance right.