Remote Sellers: The COVID Calm Before the Sales Tax Storm
Last Updated on August 18, 2022
The economy will be forever changed by the COVID-19 pandemic. The way we live. The way we work. The way we buy. The challenges ahead are far from over despite states beginning to reopen.
With millions unemployed and the service sector on life support, state and local government budgets are left with a hefty deficient in regards to sales tax revenue. On average, sales tax comprises over 30% of state tax revenues. While sales tax comprises 17% for Pennsylvania and New York budgets, it comprises 47% of Washington State and 35% of Texas respectively.
So with the hospitality and entertainment industries at a standstill, and brick & mortar stores barely alive, where will states go to make up this revenue? The Wayfair Supreme Court decision from two years ago (almost to the day – June 21, 2018) will ultimately incentivize states to aggressively pursue e-commerce or remote sellers which have largely enjoyed not having to collect and remit sales tax.
Economic nexus was viewed by many as something that would simply “go away” or be challenged, but as online sales continue to grow, it is inevitable that states will focus on economic nexus. “While ecommerce hasn’t been nearly strong enough to offset brick-and-mortar losses, it is mitigating the severity of retail’s decline,” says a recent report from eMarketer.com. “Ecommerce sales will climb 18.0% to reach $709.78 billion this year, representing 14.5% of total US retail sales in 2020.”
States have relaxed fees for sales tax registrations and even granted liberal grace periods for taxpayers to register and begin collecting and remitting tax. What even constitutes economic nexus has been in a state of flux where gross, wholesale, taxable, non-taxable and marketplace facilitator variables can affect whether you should register or not.
Since the Wayfair ruling two years ago, taxpayers who have met the economic nexus thresholds and have yet to register are exposed. Furthermore, depending on the amount of sales into a particular state, a simple registration may no longer safeguard against prior exposures.
For remote sellers who have yet to register, COVID-19 is actually a second grace period, but it won’t last forever. Most states are granting extensions and waiving penalties for taxpayers as a result of the pandemic, but like the differing thresholds, every state is different. For example, North Carolina is waiving penalties for taxpayers who have failed to obtain a license, file a return or pay tax by the due date. However, those penalties will only be waived until July 15, 2020.
Remote sellers should use this time wisely to be proactive and evaluate their economic nexus landscape. Have your sales eclipsed the necessary thresholds? Can you quantify the difference and understand the complexities between direct sales and marketplace facilitators? Do you need to register in exposed states or is a voluntary disclosure agreement (VDA) needed due to the amount of exposed sales? The dynamic change in the economy will target remote sellers to make up the sales tax delta in SALT budgets, but there is time to keep the target off your back.
TaxMatrix celebrates its 21st year in sales and use tax consultancy, performing myriad economic nexus services, including: economic nexus studies, exposure analysis, sales tax registrations and voluntary disclosure agreements. For more information, contact us today!