This year, omnichannel ecommerce has offered retailers a range of opportunities to reach more customers and serve them more conveniently. According to McKinsey, the massive consumer shift to online shopping across categories and the adoption of ecommerce by consumers and businesses during the pandemic is likely here to stay. Retailers have embraced a number of creative strategies to serve customers during life at home, including virtual try-on options, buy-online and pick up in-store, and expanding on to new platforms like marketplaces. Still, as retailers grapple with the changes in consumer behavior in an online-first world, there are also a number of tax requirements that retailers must keep in mind as the world turns to ecommerce. As the New Year approaches, here are three tax considerations retailers need to be aware of to stay compliant and protect their customer experience.
Expanded Tax Obligations
With the acceleration of ecommerce due to the COVID-19 pandemic, many retailers have likely triggered new sales and use tax obligations due to online sales. As a result of the 2018 South Dakota v. Wayfair, Inc. Supreme Court decision, states have the ability to impose sales tax obligations on remote sellers, even if the business has no physical presence in the state. Today, more than 40 states have enacted what are referred to as economic nexus laws and require remote sellers to register, collect, and pay sales tax if they meet the state’s established sales revenue threshold. With consumer preference shifting toward ecommerce, retailers will need to understand the sales tax laws in each jurisdiction they sell into to remain compliant — a process that can easily become burdensome as every jurisdiction likely has different sales tax rates, rules, and processes.
Similarly, marketplace facilitator laws add another layer of complexity for retailers to consider when selling online. These laws place an obligation on online marketplaces like Amazon, Etsy, and Walmart to collect and pay sales tax to states on behalf of the retailers selling through the marketplace. While these laws take the onus off many ecommerce sellers, some states count marketplace sales as part of economic nexus thresholds, which requires the seller to include marketplace sales in their threshold totals. Ultimately, regardless of which and how many online channels a retailer sells through, manually tracking sales tax obligations and accurately calculating rates on transactions is virtually impossible.
Increased enforcement and changing legislation
Like many privately-owned businesses, the pandemic has had a detrimental impact on many state budgets. Because states need to balance their budgets, it’s likely that the enforcement of economic nexus and marketplace facilitator laws will increase, as well as changes to the tax laws and taxability to expand revenue streams.
A June 2020 survey of businesses found that nearly half of applicable businesses have not yet complied with economic nexus laws. As enforcement of sales tax compliance ramps up, it’s likely that ecommerce sellers will be seen as low-hanging fruit for auditors seeking businesses that are non-compliant. In fact, the enforcement of these laws on remote sellers has already begun. In October, Kansas Revenue Secretary Mark Burghart said the department intends to go after non-compliant remote sellers, starting with large sellers before moving on to small sellers.
Many states may also be looking to change their sales tax legislation to increase revenue that they can collect from retailers. For example, Florida, Kansas, and Missouri may finally require marketplace facilitators to collect and remit tax on behalf of third-party sellers as most other states do. All three states could seek to use that additional tax revenue to recover from the budget deficits that the pandemic created this year.
While many retailers continue to focus on keeping their business afloat and meeting changing customer expectations, failing to comply with new economic nexus obligations brought on by an increase in online sales and changing legislation will have a long-lasting financial impact on retailers. Moving forward, retailers should expect states to take a more aggressive approach to auditing as soon as the pandemic allows. As such, investments in technologies and processes to maximize the accuracy of tax calculations and ensure new obligations to collect tax are tracked will be key to preparing and protecting businesses from audits.
Brexit to increase cross border complexity
Tax complexity for online sellers isn’t exclusive to the U.S. After the U.K. leaves the European Union (EU) on January 1, 2021, the country will be making a number of changes to ecommerce and marketplace value-added tax (VAT) rules for non-U.K. sellers.
For U.S. ecommerce sellers and marketplaces, these changes will impact VAT requirements for goods located both outside and inside the U.K. at the time of transaction. Any goods consignments coming from outside of the U.K. and passing through customs that do not exceed $175 will be subject to the new VAT regime, which means international sellers will have to collect the VAT at the time of checkout instead of having VAT collected when the shipment is delivered. This change will also require sellers to have their goods VAT registered in the U.K. before they can make shipments into the country.
Additionally, the new VAT rules will impact marketplace facilitators by placing the responsibility to calculate and collect VAT at the time of checkout on sales made through a marketplace on them. The obligations for marketplace facilitators will require them to collect numerous pieces of data ranging from the ship-from country, location of seller, to the intrinsic value and nature of the goods consignment to determine the correct standard, reduced, or zero-rated VAT treatment. Marketplace facilitators will also be held liable for under-declared VAT on the transactions they manage for their third-party sellers. They will need to retain electronic records accounting for all transactions, including those that they were the facilitating deemed supplier and where the seller was responsible for the VAT, for a minimum of six years.
It’s no secret that the COVID-19 pandemic has defined 2020 and its influence will carry on into 2021. The pandemic quickly changed how we learn, shop, socialize, travel, and work, all of which have made a lasting impact on the economy. As sellers navigate the changes from this year, the complexity of sales tax will continue to compound as ecommerce grows and states begin pursuing new areas to enforce tax regulations. For sellers that don’t have the processes and technology in place to manage to change sales tax obligations in real-time, any growth in ecommerce will make manually managing tax compliance more time-consuming and costly, while also putting their businesses at risk for future audits.