TTR IncHow COVID, Sales Tax on ECommerce, and Wayfair Affect Small Businesses
In the last five years, there has been a slow but steady increase in e-commerce sales. 2019 saw a 14.9 percent increase in online sales. That has caused a decline in sales tax revenue for states because those sales no longer occur in a store. To make up for that decline, states are looking at new and different ways to collect sales tax for online sales. This is now a hot topic as the Wayfair decision by the Supreme Court gives states greater leeway to collect sales tax for online sales, changing the game for many retailers.
The United States Supreme Court ruled 5-4 in South Dakota v. Wayfair that states can mandate that businesses without a physical presence in a state, but with more than 200 transactions or $100,000 in in-state sales per year, collect and remit sales taxes on taxable transactions in the state. This means such businesses have “nexus” in those states. While states have attempted to compel businesses to do this for several years via different economic nexus rules, Wayfair set a threshold that is fast becoming the law of the land as more and more states to implement similar laws.
Even so, the nexus threshold set by Wayfair seemed like a high target for many small businesses selling online, until COVID-19 and the stay-at-home orders lit a fire under online sales. Americans have started purchasing many other items they would not normally buy online – groceries, personal items, even furniture, and cars and there’s no putting that genie back in the bottle. Many say, now that they’ve experienced the ease and convenience of home delivery, they’re not likely to go back to their old shopping habits.
The upshot: Amazon’s sales are up 29% in Q1 2020, and other online marketplaces, like Etsy, which serves smaller businesses, have also seen an unprecedented surge in sales. Etsy reported a 31% year-on-year growth in sales for Q1 2020.
States and Sales Tax Revenue
The pandemic and the stay-at-home orders have drastically reduced the amount of sales tax revenue states normally receive. States are holding emergency budget meetings to figure out how to continue to deliver services to their residents while facing a reduced income stream. They are urgently looking for ways to replace that lost income. The clock is ticking. The start of the new school year is not that far away, and they must make decisions about how to balance their budgets.
In this environment, online sales are low-hanging fruit. States, where goods are being delivered via online sales, are rushing to propose legislation so that they can get their share of this revenue.
How This Affects Small Businesses
The surge in online sales means that even small businesses selling products online can quite easily reach the nexus threshold of 200 sales in a state – it doesn’t take much and means they may be liable to collect tax on their sales in that state. This gets complicated very quickly as these businesses cross the nexus threshold in multiple states, as the rules and requirements can be very different from state to state.
The Wayfair nexus decision coupled with this surge in online sales means thousands of small businesses will be exposed to new sales tax compliance issues all over the country that they were not even aware of. For example, if a small business is physically located in a state that does not collect sales tax, but is selling in other states, prior to the Wayfair decision it mostly did not have to worry about collecting sales tax. Now that’s all changed.
Small businesses face a compliance minefield requiring expert assistance to get sales tax right. Not surprising when you need to know the exact rules for sales tax in each state:
• Whether an item is taxable
• In which location
• What the tax rate is
• Whether an exemption applies
• What the filing and reporting requirements are
One free resource that can help them do this is the Uniform Tax Matrix (UTM) available on the TTR website.