Three years ago last month, the U.S. Supreme Court decision in South Dakota v. Wayfair Inc. forever changed how businesses must think about sales tax. The landmark decision made it so that states could impose sales tax on transactions that take place in their jurisdiction regardless of the seller’s physical presence through what is known as economic nexus legislation.
Today, 44 states, the District of Columbia, and parts of Alaska have implemented economic nexus laws–with Florida becoming the most recent state to adopt legislation. As a result, businesses selling across the U.S. now face a patchwork of economic nexus laws as most states have approached the rules around the legislation in different ways. For example, Georgia requires sellers to collect sales tax on remote sales over $100,000 or if the seller has 200 or more transactions in the state. However, their neighbor in Alabama only requires sellers to collect remote sales tax if they have more than $250,000 in sales.
The complexity created by Wayfair-era laws has also been exacerbated over the last year as the pandemic pushed even more businesses online. As businesses of all sizes were essentially forced to ramp operations online amid mandated in-person closures and in the wake of the pandemic, we’re likely to see more businesses maintain an omnichannel approach as consumers look for blended online and offline shopping experiences.
To better understand the full impact of Wayfair and the recent changes driven by the pandemic, Avalara partnered with CPA Trendlines to survey accountants for their view on the impact on the accounting profession and their clients–the small businesses that make up our community. Chief among the findings is a common denominator–Wayfair’s impact will be long lasting.
Some of the key findings include:
Small businesses are overwhelmingly noncompliant with Wayfair laws
Nearly all accountants agree when it comes to compliance with remote sales tax laws among small businesses. Ninety-eight percent of respondents believe that small businesses are failing to comply with the remote sales tax laws for which they may be liable in some way. Interestingly, the accounting perspective on small business compliance takes a much more conservative slant than when small businesses grade themselves. A December 2020 survey found that 42% of small businesses considered themselves to be completely compliant with Wayfair laws.
While most accountants believe noncompliance is widespread, what does that mean in terms of the impact on small businesses? Several respondents provided verbatim comments on the impact to small businesses, including:
- “More costs to comply; lack of complying could bankrupt a company.”
- “Surprise audits for those that are not compliant.”
- “Potentially large administrative burden for small businesses to comply with reporting.”
While most small businesses will likely have to overcome the first hurdle of getting compliant with Wayfair laws, it’s clear that the potential long-term impacts are far-reaching and have major implications for businesses.
Many accountants are unable to support their clients’ sales tax issues
While small businesses face their own challenges when it comes to sales tax management, the survey also found that many accountants are coming up against challenges of their own. Some 59% of accountants noted that they are falling short of handling all of their clients’ remote sales tax issues. While sales tax isn’t a focus for some accounting professionals, a significant portion express desire to serve their clients’ needs but lack the knowledge or technology to do so.
Technology is needed to address Wayfair laws
Despite the clear challenges that sales tax poses to both accountants and their clients, the survey uncovered some hope for both when it comes to technology. For accountants, 54.5% agree their own technology and workflows must be adapted for a more online or “virtual” environment. For small businesses, more than half of accountants believe that the ability to keep up with changes in online technologies is most important for small businesses today with the most profound consequences.
Respondents also acknowledged the importance of leveraging e-commerce platforms and online marketplaces by noting that each will have long-term impacts on small business success. As small businesses continue to adopt new technologies and channels to keep pace with consumer expectations, it’s likely that their remote sales tax obligations will grow and further increase the need for technology to manage tax.
It’s clear that businesses have much more work to do when it comes to complying with Wayfair laws even three years later. As their trusted advisors, accounting professionals have made it clear that as business becomes omnichannel, Wayfair laws will have an even greater impact on small businesses. Fortunately, accountants and businesses alike have much to gain from technology when it comes to effective remote sales tax management.
As we move forward in the post-Wayfair era, complying with remote sales tax laws will become imperative for businesses that want to avoid risk. However, businesses will want to consult with their accounting advisors and establish a foundation for compliance that is built on technology, so that they can remain compliant as rules continue to change and their business grows.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Liz Armbruester is Senior Vice President of global compliance operations.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.