Add Insights to your inbox - get the latest
professional news for free.
18 SEP 2024 / TAXES
It’s been six years since the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., flipped the script on sales tax collection. This landmark ruling eliminated the need for businesses to have a physical presence in a state before being required to collect and remit sales taxes. For some, it was a sigh of relief; for others, it opened a Pandora’s box of compliance headaches. So, what has really changed since that fateful June 21, 2018 decision, and where do we stand today? Let’s dig in and unravel the tangled web of state sales tax compliance post-Wayfair.
Today, the U.S. sales tax landscape is a complex mix of varied rules, thresholds, and rates, differing from state to state. Most states with sales tax have adopted economic nexus laws, with specifics like sales thresholds, definitions of taxable items, and who collects the tax varying widely. Sales tax rates in 2024 range from 0% in states like Delaware, New Hampshire, and Oregon, to as high as 7.25% in California, with local jurisdictions adding additional percentages that can push total rates above 10% in some areas. This evolving environment forces businesses to stay vigilant, invest in compliance technology, and seek expert guidance to navigate the ever-changing rules.
The Domino Effect. After the dust settled from the Wayfair ruling, it didn't take long for states to get in on the action. South Dakota’s model set the stage, and states rushed to enact their own sales tax economic nexus laws. By January 1, 2023, every state with a sales tax had jumped on board, setting various thresholds for remote sellers. Some states like New York dusted off old, dormant laws that were previously blocked by the physical presence rule, wasting no time in enforcing them.
However, it’s not all peaches and cream. The scramble to impose economic nexus has led to a mishmash of rules and thresholds. While most states have adopted a sales threshold, the dollar amounts, effective dates, and even what counts toward that threshold differ widely. Imagine trying to play a game where each state makes up its own rules—it’s enough to make your head spin!
For instance, states like California consider electronically downloaded software tangible personal property (there’s a curveball!), while others like New York do not. And let's not forget the marketplace facilitator laws, which pile another layer of complexity on remote sellers and platforms like Amazon and eBay, requiring them to handle sales tax collection.
Marketplace facilitators are now required to navigate various state-specific definitions, some broad and some narrow, about what constitutes a “marketplace.” In some states, nearly all online platforms that connect buyers and sellers are on the hook for sales tax collection. In others, platforms may dodge this responsibility if they don’t process payments directly. Keeping track of these variations feels a lot like trying to juggle flaming torches while blindfolded—not exactly an easy task for tax departments already stretched thin.
A Lack of Uniformity is Making Tax Pros Sweat. One of the biggest challenges since Wayfair has been the lack of uniformity in state laws. States have set different economic nexus thresholds—some at $100,000, others at $500,000. Some states include all sales; others exclude services or digital goods. It’s like a salad bar where every state adds its own mystery ingredients. And then there are transaction counts: sell a high volume of low-cost items, and you might still hit nexus even if your revenue is peanuts.
This disarray has led to a game of “guess the rules” for tax professionals trying to navigate compliance. Some states have also introduced quirky sourcing rules that dictate where a sale is taxed—at the point of sale or the point of delivery. For example, Colorado requires remote sellers to collect based on where the buyer is located, while small in-state sellers only collect based on their own location. Confused yet? You’re not alone.
To add another wrinkle, marketplace facilitators, like Etsy and Walmart, face different requirements depending on the state. In some places, they’re on the hook for collecting all sales tax; in others, it’s a mix-and-match scenario. This patchwork of rules has made compliance a full-time job and then some.
The American Institute of CPAs (AICPA) has highlighted the burdens caused by these inconsistencies, especially around what counts as a “transaction.” Is it each line on an invoice? The entire invoice? Or maybe it’s a contract billed in installments? Each state seems to have its own answer, and that means businesses can get caught in a tangle of red tape.
With new rules cropping up faster than a Starbucks on every corner, many businesses have turned to technology to keep pace. Sales tax software, robotic process automation, and exemption certificate management tools have become hot commodities in the world of tax compliance. It’s like having an air conditioner during a heatwave—you didn’t think you needed it until you did.
Sales tax automation platforms can track constantly changing tax rates and help businesses apply the right tax codes. Robotic Process Automation (RPA) can even automate the repetitive tasks of sales tax compliance, like populating forms and filing returns. Companies are also turning to exemption certificate management software to handle one of the biggest headaches of all: keeping track of which customers are exempt from sales tax and why.
Still, not everyone has the cash to splash on fancy software, and the complexities often mean even automated systems need a helping human hand. Outsourcing tax compliance is becoming more appealing, especially for small to mid-sized businesses that can’t afford to devote resources to understanding every state’s unique sales tax quirks. Tax professionals who specialize in this area have become lifelines, stepping in to manage the convoluted maze of state and local tax laws.
However, despite all the tech bells and whistles, many companies find themselves overpaying sales taxes. Vendors unfamiliar with the taxability of certain products or services in various jurisdictions often collect taxes even when they’re not required. It’s a classic case of “better safe than sorry,” but it’s also an opportunity for businesses to audit their tax payments and recover those overpayments before the window closes.
Wayfair’s impact on state coffers is anything but chump change. According to the U.S. Government Accountability Office, states raked in $23.3 billion from remote sellers in 2021 alone—a sharp increase from the $3.2 billion collected in 2018. And it’s not just sales tax that’s benefiting. Some states have expanded economic nexus rules to other areas, including accommodation taxes, meals taxes, and even bizarre fees like waste tire charges. If it moves, states are finding a way to tax it.
But while states are smiling all the way to the bank, businesses are grappling with increased compliance costs and the risk of overpaying taxes in unfamiliar jurisdictions. Many companies have found themselves remitting more tax than required, especially when vendors collect taxes on sales that aren’t taxable. With statutes of limitations typically around three or four years, businesses would be wise to conduct a sales tax audit of their payables before those refund opportunities disappear like yesterday’s news.
It’s not just the dollar figures that are staggering. States have also dramatically broadened their tax bases, pulling more products and services under the tax umbrella. Digital goods, cloud computing, and other intangibles that once skirted the tax man’s grip are now fair game. States have even gone so far as to tax amusement activities like streaming services and digital downloads—adding another layer of complexity for companies operating in this evolving space.
As we hit the six-year mark, it’s clear that Wayfair has permanently altered the sales tax landscape. For businesses, the question is no longer if they have to comply, but how they’ll keep up. States continue to expand their tax bases, moving beyond sales tax to other indirect taxes and fees, often at the local level where compliance is even murkier.
And let’s not forget about the ongoing court battles that could further shape the landscape. Localities in places like Colorado and Louisiana are fighting to retain their own taxing authority, setting up a potential showdown that could redefine how sales tax compliance is managed across the U.S.
It’s also worth noting that the complexities of economic nexus aren’t confined to sales taxes. Other transaction taxes, such as hotel accommodation taxes, meals taxes, and even telecommunications fees, are also subject to these economic nexus thresholds in some states. In places like Wisconsin, businesses must remit municipal room tax directly to over 300 different local governments—talk about jumping through hoops!
The old adage rings true—there’s no such thing as a free lunch, and in the world of post-Wayfair sales tax, businesses are footing the bill. Whether you’re a tax pro trying to keep up with the ever-shifting sands or a business owner grappling with a mountain of compliance paperwork, one thing is certain: Wayfair is the gift that keeps on giving, for better or worse.
So, what’s the next chapter in this saga? For starters, businesses need to stay vigilant and proactive. Regularly auditing your sales tax processes, investing in automation, and keeping an eye on state legislative changes are essential strategies. If the past six years have taught us anything, it’s that states are not done tinkering with their tax codes—and remote sellers are firmly in their crosshairs.
Tax professionals, too, have their work cut out. They need to educate clients on compliance, identify opportunities for refunds on overpaid taxes, and leverage technology to streamline the increasingly complex process of multi-state tax filings. As Benjamin Franklin famously quipped, “In this world, nothing can be said to be certain, except death and taxes.” In the post-Wayfair world, the latter has never felt truer.
So, as we navigate this brave new world of sales tax, remember: compliance isn’t just about checking boxes. It’s about staying ahead of the curve, anticipating changes, and adapting faster than the taxman can write new rules. With the Wayfair decision in the rearview mirror, one thing’s clear—economic nexus is here to stay, and the only constant will be change.
Feel free to share your thoughts on this with us, and stay tuned for more insights! Don't forget to subscribe to our weekly newsletter for updates.
Join Insights for your daily dose of the latest, uninterrupted updates, all delivered in under 3 minutes
