COVID Changes: Are Retailers Ready for Sales Tax Ramifications?

It wasn’t that long ago when retailers were running post-holiday sales and restocking shelves for the new year. Following a peak holiday shopping season, retailers expected to go back to business as usual. No one could have anticipated that COVID-19 would emerge and affect U.S. business operations and daily life as we know it. Many states were quick to act, issuing stay-at-home orders and social distancing guidelines with a goal of minimizing the spread of the virus.

Retailers quickly followed suit, minimizing brick-and-mortar store hours to allow for cleaning, enabling last-mile delivery and curbside pick-up options for online shoppers and turning boarded-up boutiques into warehouses to fill burgeoning e-commerce orders. These quick shifts helped sellers maintain cash flow in the face of public health requirements and changes in consumer behavior.

In turn, smaller and mid-sized businesses that maybe had a minimal online presence before the outbreak have been ramping up efforts to fulfill a high volume of online orders. While online sales have provided an excellent way to keep operating during efforts to flatten the curve, there are longer-term ramifications that they may be unaware of or unprepared to manage, including collecting and remitting sales tax for jurisdictions where they conduct business.

Rise of Internet Sales

In 2019, consumers spent $601.75 billion online with U.S. merchants, a 14.9% increase year-over-year. Before the onset of COVID-19, many estimates predicted that more than 230 million U.S. consumers would shop online by 2021.

However, when the pandemic hit, e-commerce became the only channel to buy products deemed non-essential. In fact, most retail sectors have seen a 74% growth in online shopping in March 2020 compared to the same period last year.

While this growth is a lifeline for many retailers and a welcome boost for essential sellers, an increase in online sales adds more complexity for businesses unfamiliar with the tax compliance ramifications of expanded e-commerce.

Internet Sales & Economic Nexus

In the late 1990’s and early 2000’s, as internet sales gained in popularity, state governments could only mandate companies to collect and remit sales tax if those businesses were physically present in a jurisdiction. Struggling to maintain their tax coffers, states enacted “affiliate,” “click-through” and even “cookie” nexus rules in an attempt to capture as much online activity as possible under existing Constitutional restrictions. But only a fraction of the total e-commerce pie was within their reach.

Fast forward to 2018 when the Supreme Court ruling in South Dakota v. Wayfair fundamentally changed the sales tax landscape. The ruling said that nexus, which determines whether a business can be compelled by a state to collect its tax, need no longer solely be determined by physical presence in a state. Instead, the Supreme Court gave state governments the greenlight to require sales tax collection and remittance on e-commerce sales based solely on a sellers economic (sales volume or number of transactions) connection to the state. Of all states with a sales tax, all but two have “economic nexus “ sales tax rules in effect today.

Reducing Audit & Penalty Risk with Tax Software

In the past few months, states have been adjusting the timing of remittance and filing obligations in order to provide short-term relief for retailers who may be struggling with compliance challenges. However, as COVID-19 economic recovery plans begin to roll out, re-establishing sources of revenue will be a priority for all governments. While tax rate increases and new levies may be in the offing once we get past our elections in November, it seems probable that states will also seek to expand tax enforcement activities to include remote e-commerce sellers as a means of closing projected revenue shortfalls.

With virtually every state already applying an economic nexus standard, small and medium-sized retailers need to evaluate their sales volume on a state-by-state basis and determine where they may need to register. The financial risk (i.e. tax, penalty and interest assessments) for ignoring sales tax collection and reporting requirements is steep and growing every day.

Retailers large and small need to take the time to implement a tax strategy that accounts for existing and expanding e-commerce compliance challenges – if they haven’t already. The tax landscape may have changed, but there are ways to keep up.

To reduce the burden on businesses, tax compliance software is available for any organization affected by economic nexus rules. Automated sales tax solutions can, in real-time, accurately determine the applicable rate and rule, place the transaction on the proper tax return, and arrange for tax to be remitted in the right amount and at the right time. Retailers can rest easy in case of an audit knowing their compliance is sound and backed with regulatory expertise.

While today’s circumstances have caused companies to open new e-commerce channels to meet the demand for non-essential goods and to keep revenue streams flowing, the switch will cause the number of businesses crossing economic nexus thresholds in multiple (if not all) states to rise sharply. This means sellers will be held accountable for tax compliance. As governments seek to recoup revenue and enforce collection, it’s imperative that retailers understand tax rules and obligations to safeguard themselves from the risk of modern tax.

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Charles Maniace is vice president of regulatory analysis and design at Sovos, a leading global provider of software that safeguards businesses from the burden and risk of modern tax. An attorney by trade, Chuck leads a team of attorneys and tax professionals responsible for all the tax and regulatory content that keeps Sovos customers continually compliant. Over his 17-year career in tax and regulatory automation, Chuck has provided analysis to WSJ, NBC and more.

Sales Tax