Marketers prepare for changes in states’ sales tax nexus laws
States can now pass legislation that requires online retailers to collect sales tax from buyers. What can you do to prepare?
It’s been two months since the Supreme Court ruled that states can now introduce legislation that will require e-tailers above a certain sales threshold to collect sales tax. It overruled a previous decision that took them off the hook from collecting sales tax from customers in states in which they did not have a physical presence — or nexus.
- The new decision paved the way for states to introduce their own sales tax nexus laws.
- Shortly after the ruling, the National Conference of State Legislatures (NCSL) recommended that states wait until Jan. 1, 2019, “to begin sales tax collection requirements on remote sellers.”
- No state has yet introduced sales tax nexus legislation, but most marketers know it’s imminent.
Since then, it’s been quiet. Too quiet. Meanwhile, is there anything that marketers can do?
There’s no need to panic, SMBs will be fine
Scott McKirahan owns and operates e-commerce websites and teaches businesses how to run their own.
“The Supreme Court ruling only threw another monkey wrench into an already confusing system,” McKirahan said. “Fortunately, very few online stores will be affected … Most SMBs have very little to fear from the recent ruling.”
McKirahan said the businesses that will suffer the most are online retailers that trade in inexpensive products, what he calls “nickel and dime stuff.”
“Sites passing the dollar threshold figures are the ones in danger of having to cough up real money, so sites selling big-ticket items need to be particularly watchful,” McKirahan said.
He also said that “brick and mortar stores that think they will see an increase in revenue because of the Supreme Court decision are in for a sorry surprise.”
“Practically nobody buys online to save a few bucks on taxes. Most people buy online because the selection is better, the information is better and it is far more convenient to shop at home. And, of course, very few sites are going to be affected by this ruling anyway. Walmart stocks just shot up after earnings reports indicated one of the best quarters in their history — twice what they were projecting. It included a 4 percent rise in retail store sales and a whopping 40 percent increase in online sales. Walmart has a physical nexus in every single state, so people have always been paying sales taxes with their website. Those online sales taxes don’t seem to be having much of an effect at all on consumer shopping habits for them.” McKirahan said.
Look for plug-and-play tax solutions
Magento Head of Payments Andy Barker said that “there’s no need to completely overhaul your internal operations to meet new legislation, especially if you’re a merchant who’s already paying taxes in certain states.”
“Instead, lean on the solutions that are readily available and can be plugged into your existing site,” Barker said. “Embracing commerce technology is one of the best, if not the best, way to approach the aftermath of [the decision].
Barker says that marketers should consider the following:
- The nexus in their state: [The ruling] permits states to set their own economic nexus, the threshold above which businesses will be taxed. Barker says that “it’s important to evaluate where your business operates and the volume of purchases made each year to avoid being blindsided when new tax laws are passed.”
- Operations from state to state: Barker says if you’re operating in a state with low profits, it may be the time to consider whether it makes sense, both financially and operationally, to continue serving customers in that state.
- Overall resources: E-commerce solutions like TaxJar, Vertex and Sovos can help manage taxes, as well as offer customized resources to help meet your business’s unique needs.
Prepare for a hit to sales, at least temporarily
“I anticipate and am prepared that it will decrease business by 20 percent or so initially,” said Chris Mayatte, the owner and operator of two online stores.
But customers won’t likely stay away.
“I think after a year or two that the convenience will supersede the customer’s anxiety and the vast majority of customers will come back. I equate it to my feelings when Amazon started charging sales tax to my state — I started looking around for alternatives for a few months and finally gave in and paid for the convenience. I also feel like this may benefit medium-sized businesses like us (that have the capabilities of dealing with the paperwork etc. that will come with this change) because I predict a lot of smaller competitors that are just getting by may not survive this extra burden,” Mayatte said.
Scott Peterson, vice president of US tax policy and government relations for tax solutions provider Avalara, said that small businesses should “contact their CPA and determine if you created nexus in any jurisdictions over the year.”
“Nexus laws are often quite complex and each state is different. It’s important to review the laws in each new state where you conducted business. If you have indeed established [a] nexus, check the state’s sales tax laws so that you can accurately calculate, file, and remit your sales tax liability,” Peterson said. “Sales tax collection and remittance is not a profit center. It doesn’t make money for your business. The name of the game is to minimize your risk of an audit while maximizing your efficiency. This will (1) save you significant time and resources in the event of an audit, and (2) allow you to re-deploy resources to business areas that actually increase your revenue.”
Lobby legislators for a national internet sales tax
Not only would it help companies manage an otherwise patchwork set of laws, but McKirahan says it also could have other positive benefits.
The only thing that would have an impact is a national internet sales tax that applied to every single sale from every single site, no matter the dollar volume or the number of sales,” McKirahan said. “That money could then be doled out to states via appropriations like they do with other federal taxes. It would also make compliance far easier for all online stores — big or small — and would also permit the government to collect sales taxes from foreign-owned websites that sell to the US. Of course, that would mean a long-overdue federal law and would take both sides of the aisle in both houses of Congress working together. When is that last time that happened?”