Remote Sellers Beware-Wayfair is Here!
Oct 31, 2019
Since 1992, e-commerce has been a rapidly growing sector and has transformed the way consumers shop by replacing more traditional brick and mortar stores. This continuously expanding space of retailers has left tax agencies struggling to determine how to assess sales tax and which states have a right to collect sales tax on the goods and services being sold. According to the Government Accountability Office (GAO), state and local governments could be collecting more than $13 billion in taxes from these out-of-state online purchases. Tax agencies around the country are starting to take notice of this gap, and in 2016, the South Dakota Legislature enacted a law requiring out-of-state sellers to collect and remit sales tax, as if the seller had a physical presence in the state. Concerned about the loss of its sales tax base and corresponding loss of critical funding for state and local services, the legislature enacted the law to target sellers that have over $100,000 in sales or 200 separate transactions each year. Since the South Dakota law was enacted, several other states have been drafting similar legislation with their own thresholds and specifications to begin collecting e-commerce sales tax (see table below).
The game changer for compliance during these new changes will be how automated collection will be, especially on larger marketplace platforms. Tax avoidance opportunities will be greatly reduced. In addition to the previously mentioned laws, states are also passing marketplace facilitator statutes which will put the responsibility to collect and remit sales tax on large retail marketplaces such as eBay, Amazon, and Etsy, which often have third-party sellers. Platforms can utilize Certified Service Providers (CSP), which are certified under the Streamlined Sales and Use Tax Agreement to perform all the seller’s sales and use tax functions. CSPs are designed to allow businesses to outsource most of their sales tax responsibilities. A combination of marketplace facilitators and CSP programs leave less room for missed revenue, without the need for enforcement resources.
While there will be many efforts to automate compliance, there will naturally be retailers trying to dodge new regulations. States that don’t utilize CSP programs still have some risk of businesses evading compliance. Compliance and enforcement will look very different state to state. Some states with strong home-rule cities and counties may need to make their tax systems simpler before they can focus on enforcement. While there continues to be shifts towards compliance, there remains possibilities for fraud.