In the last 10 months, much of daily life has been turned upside down. Large events have been canceled, schools have switched to distance learning and many workplaces are still depending on remote setups for employees.
One of the many other consequences of the pandemic is the temporary closure of in-person retailers. Between this and understandable safety concerns, many consumers have turned to online shopping as their default.
This has offered many retailers the lifeline they needed to stay afloat during the pandemic, but it’s also creating problems for those that were unprepared for the complex tax burdens associated with online retail.
A Crash Course On Economic Nexus
Seasoned online retailers and frequenters of this blog are likely quite familiar with economic nexus, but small business owners who have just started to dip their toes in because of the pandemic can easily be caught unaware. Even retailers who previously sold online and are familiar with the concept may have found themselves caught off guard by the increased tax burden when online sales took off earlier this year.
So, what is economic nexus?
In short, states that have passed economic nexus legislation (more than 40 as of this writing) can require out-of-state retailers to collect and remit online sales taxes even if they have no physical presence within the state. Economic nexus is generally triggered through sales or transaction thresholds (which vary by state) and can be as little as 200 transactions and/or $100,000 in sales.
After the 2018 Wayfair v. South Dakota ruling, many states rushed to put economic nexus in place. Many have also implemented marketplace facilitator legislation, which shifts the burden of collecting and remitting sales taxes from the seller (who might be a small business) to marketplace facilitators (like Amazon or eBay).
How Is Economic Nexus Related To The Pandemic?
Several months ago, we shared an article discussing how COVID-19 is affecting economic nexus and other related legislation. While many states initially relaxed enforcement on tax collection, those states are now looking for additional revenue sources and ways to reduce fiscal shortfalls.
A handful of states have already lowered sales thresholds within the last year or made other changes to economic nexus or marketplace facilitator legislation. While some of these changes were already in the works before the pandemic hit, many were rushed through the legislative process as a result.
Tax professionals expect even more changes as we head into the 2021 legislative session. While the 2020 sessions were largely tied up with health and wellness concerns, there will be ample opportunity in the coming year for Wayfair-related legislative changes.
What Should Small Online Retailers Do?
The economic impact of the pandemic will be far reaching, and regardless of how well individual states weather the storm, small online retailers should expect that the thresholds may continue to lower, and states will become even more aggressive when it comes to tax compliance. Also, we expect audit enforcement to pick up as well, as states try to fill the deficit gap.
The best way for small business owners to protect themselves is to be proactive about fully understanding nexus concepts (yes, we can help with that too!) and preparing themselves for multi-state sales tax compliance. Don’t wait until a state comes knocking to check whether you’re triggering economic nexus. Likewise, make sure you’re up to date on marketplace facilitator laws in your state and how they might affect your online business. Hint – while these laws were supposed to make it easier for small businesses, there are still likely filing ramifications and the rules can be confusing.