In the five years since the momentous Wayfair decision by the U.S. Supreme Court, the sales tax landscape has shifted dramatically. Until that point, nexus—the connection between a seller and a state that requires the seller to collect and remit sales tax there—was based solely on having a physical presence in a given state. E-commerce taxes weren’t a thing: Many online purchases weren’t taxed, and life was a lot easier for internet sellers (and less expensive for their customers).wordpress developers london
However, in the wake of South Dakota v. Wayfair, Inc. in 2018, everything changed. The decision allowed states to create nexus requirements based on the number of sales or transactions a seller has in a state, regardless of whether the seller or its products are actually located there. As a result, most states took advantage: As of this writing, 46 now have economic nexus laws. (Need to know if they apply to you? Click here to see those states and the sales/transaction thresholds.)
Compliance Challenges—and Booming Sales
This shift created significant compliance challenges. Moreover, as more states continued to introduce laws around e-commerce taxes, the complexity only grew. Even more importantly, sales tax is not uniform: It can differ not just between states but also within states. Cities and counties often levy their own taxes on top of the state’s base sales tax, which can make compliance a nightmare. Sellers must not only charge the right amount—they are also responsible for filing returns and remitting funds to each jurisdiction. (Thankfully, sellers don’t have to file separate returns for individual cities or counties.)
To add yet another wrinkle, rules and regulations change frequently, meaning companies that thought they were compliant can face unexpected challenges.
Nevertheless, buyers didn’t turn away from online shopping, even though they had to adjust to the idea of paying sales tax. In fact, they shopped more: According to the International Trade Administration, global B2C e-commerce sales are expected to grow from approximately $3.3 trillion (USD) in 2021 to USD $5.5 trillion by 2027. While some of that increase may be attributed to the pandemic, it’s clear that Wayfair hasn’t pushed sellers—or consumers—away from e-commerce.wordpress developers london
Tax Revenue is Booming, Too
As online sales have grown, so has tax revenue. Consequently, the economic nexus laws enacted after Wayfair have proven to be a boon for states. The U.S. Government Accountability Office reports that states collected at least $23 billion from online sellers in 2022—triple the amount collected in 2019 and nearly eight times what they brought in from remote sales before Wayfair.wordpress developers london
Therefore, there is significant money at stake with sales tax, and states are likely to aggressively protect this new revenue source through increased enforcement and audits.
The Cost of Audits, Financial and Otherwise
While increased sales are good news, increased audits are not. A Wakefield Research report, based on a survey of companies with annual revenues of $10 million or more, showed that the average sales tax audit costs over $300,000. Even for smaller companies, audits can be costly in terms of both money and time. Tax management can therefore be a significant challenge, but fortunately, there are solutions.
Research from Aberdeen found that businesses leveraging integrated tax software saw higher accuracy in financial reports, lower audit costs, and fewer resources spent on compliance. Thus, technology can alleviate many of the burdens associated with sales tax compliance, freeing up staff to focus on growth rather than paperwork.
Global Sales? Better Think About Global Compliance
Economic nexus is not just a U.S. concern. Sellers located outside the U.S. are subject to state sales tax laws if they sell in the U.S., even if they don’t pay federal income tax. Similarly, U.S. companies selling abroad must consider their global tax obligations. Many countries require taxes once a threshold is reached, but a few have no threshold, requiring taxes on every sale.
Therefore, whether you sell domestically or globally, staying informed and compliant is critical to avoid fines and operational disruption.
What Does It All Mean for You?
This is a lot to process. Even if you’re familiar with economic nexus and e-commerce taxes, questions likely remain. That’s understandable—you have better things to do than monitor every sales tax update. With that in mind, here are three key takeaways for your business:
1. E-commerce taxes will remain complex
The world of e-commerce taxes is fluid. Consequently, even if you are compliant today, changes are always possible. A state could lower its threshold, imposing nexus on your business, or change the way products are taxed. Rates may change, and international regulations add further complexity. Ultimately, staying proactive and monitoring these developments is critical.wordpress developers london
2. Many businesses will continue to struggle with compliance
Manual compliance across multiple states can be almost impossible. Small businesses often lack the resources, while larger companies may sell in too many markets to manage compliance on their own. According to an Avalara survey of 1,000 businesses in the U.S. and U.K., almost 40% of respondents don’t believe they are fully compliant with economic nexus laws, and only slightly more than half can explain all of their online sales tax obligations. Clearly, compliance is a major challenge.
3. Technology is more critical than ever
Most e-commerce platforms don’t collect sales tax automatically. However, platforms like Avalara AvaTax can manage everything from calculating sales tax in multiple jurisdictions to automating filings and remittances. Consequently, technology reduces errors, saves time, and frees staff to focus on revenue-generating activities. In addition, automated systems help mitigate the risk of audits and penalties, giving business owners peace of mind.
Compliance Doesn’t Have to Be an Obstacle
While sales tax compliance remains complex, the right tools, partners, and strategies can make it manageable. Therefore, you can focus on growing your business, entering new markets, and introducing new products without letting compliance get in the way of opportunity.
Want to learn how Avalara can help your business? Learn more here.
Avalara Disclaimer: Tax rates, rules, and regulations change frequently. This article is for informational purposes only and does not provide legal or tax advice.