The world of sales tax has changed a lot in the past year. Following the Supreme Court’s Wayfair decision, 2019 was the year most states began requiring businesses to collect and remit sales tax, and then began making marketplace facilitators (such as Amazon or eBay) responsible for collecting and remitting the taxes on sales that came through their marketplaces.
What changes can we expect to see this year? Keep reading for three predictions we believe are just around the corner.
3 Sales Tax Predictions for 2020
1. Smaller Retailers Will Depend On Marketplaces
As Greg Chapman, SVP of business development at Avalara explains, “We should expect traditional ecommerce providers to start working closely with marketplaces or offering more ‘Amazon-like’ experiences to stay relevant.”
The increase in online shopping coupled with confusing economic nexus laws make it even more appealing for very small businesses up to mid-sized companies to work with online marketplaces. In addition to facilitating sales in a process that’s more streamlined for customers, a lot of states have placed the burden of sales tax collection on the marketplace rather than the seller. This can greatly reduce the cost and risk of doing business online for companies struggling to navigate tricky taxability questions.
While 2018 was the year of questions about economic nexus and how our clients needed to think about dealing with that aspect, the end of 2019 (and likely into 2020), we are getting more questions about how businesses can benefit from the marketplace facilitator laws. That can take two angles: those companies who are the marketplace seller (generally the small company selling on line) or the marketplace facilitator (the Amazon-like) intermediary. We’re fielding more questions from companies that really ARE marketplace facilitators and are a bit surprised by it.
2. Increased Risk of Audit
Prior to Wayfair, many states already had various ways of looking at nexus and those rules would determine if a company was required to collect and remit taxes based on physical presence, click-throughs, internet cookies, etc. It was already confusing for businesses to know how much they needed to collect and pay to each state—and by when.
However, once economic nexus was established (e.g.; a certain amount of sales dollars or transactions established a taxable presence), in some ways it became easier, but in many ways, it became even more complicated. Sales tax software can help companies determine how much to collect and remit on each purchase, but auditors are also able to use software to double check each business is in compliance.
As Accounting Today explains, “State auditors are more sophisticated than ever and will use more sophisticated tools and data analytics to get more bang for the buck in audit targets.”
That’s not the only risk, though. As companies are beginning to register with states so they can collect and remit sales tax, some are finding states’ previous nexus provisions applied to them and they didn’t know it. It can be quite a shock to find out you owe years of taxes you didn’t realize you were responsible for!
One of the best ways to prepare your business is to do a nexus review now. If you discover the problem before an audit, you can be better prepared to handle the financial consequences. We know it can be overwhelming, but the good news is we can help with this! In addition to providing a nexus review, we can lay out next steps towards sales tax compliance so you know where to begin and then assist with remediation if it turns out retroactive liability is substantial.
3. Digital Taxability Will Expand
As the internet has expanded, the answers to sales tax questions in the digital space have become murky. Legislation written decades ago doesn’t account for the way businesses and consumers now use the digital space.
For example, is software you download a physical item you can tax? What if you just access the program online, but all the files stay in the cloud? And what about Software as a Service (SaaS)? It has service in its name, yet some states define it as taxable.
As even more consumer products and services shift online, states and municipalities will continue to find ways to keep up. This year we can expect to see more legislatures and departments of revenue grappling with and defining ways to tax digital services, apps, cloud computing and more.
Have a question? Contact Monika Miles.
Author: Monika Miles founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.