Two years after Wayfair, where are we now with online sales tax? Fear, anxiety, and noncompliance.
Immediately following the Supreme Court ruling in the landmark Wayfair ruling, dozens of states enacted laws or regulations requiring online sellers from other states to collect and remit sales taxes.
In the two years since, many of those same states have moved to impose tax-collection requirements on marketplaces like Amazon and Etsy, while many smaller sellers have been uncertain and fearful about their own tax responsibilities, according to Charles Maniace, vice president of regulatory analysis and design at Sovos, a sales-tax software provider.
“Within minutes of the Wayfair decision taking place, a number of states had already had on their books laws or rules or regulations which adopted an economic nexus standard,” Maniace said in an interview.
That process, he said, was “faster than I’ve seen states move on anything in the history of sales tax.”
States such as Vermont and Hawaii were ready to jump out of the gate as soon as the high court issued a ruling granting states the authority to collect taxes from out-of-state sellers, overturning more than 25 years of precedent. Those states had laws or rules on the books that contained trigger mechanisms that would automatically spring into effect on a court ruling such as the Wayfair case, which in turn prompted a rapid domino effect.
“And then all the other states really, really quickly fell in line,” Maniace said.
In short order, every state with a sales tax, save for Florida and Missouri, had new rules on the books setting parameters that would trigger an economic nexus for out-of-state sellers, determining what volume of sales or revenue would make them liable for collecting taxes.
Then came another broad set of initiatives to extend sales-tax obligations to marketplaces like eBay and Etsy, what became known as marketplace facilitator laws.
“We call it the ‘Wayfair second wave,’” Maniace said. “Now [almost] every state that has an economic nexus law also has a marketplace facilitator law.”
It’s hard to overstate the impact of those laws on sellers and high-volume buyers alike.
Buyers, for instance, particularly high-volume, corporate consumers, now have to rely on their vendors to calculate taxes, inviting the possibility of underpaying or “paying too much tax to sellers who are overcharging because they don’t know the rules,” Maniace said. “And that’s just money out the door.”
For tax-software providers like Sovos, the answer is obvious, and they are energetic boosters of efforts to automate tax processes like collection, remission and auditing.
But for smaller sellers, the sudden burden of having to track and collect taxes in dozens of states and thousands of jurisdictions has been daunting, to say the least. As Maniace surveys the landscape today, he sees thousands of sellers who have responded to the new tax laws and equipped their shops with software to handle collections and payments. But he also observes that there remains an untold but significant number of sellers that have avoided becoming complaint owing in part to the complexity of the nationwide tax picture, but also “for fear of past liability.”
“I still think that the tail of compliance is really long, and there are lots of ecommerce sellers that aren’t compliant, and some of them are scared out of their wits,” he said.
Those fears might not be totally misplaced.
“There was definitely a grace period for a while, where most states were more interested in bringing companies into compliance rather than looking backwards and trying to gain revenue from past transactions,” Maniace said.
“What we’re starting to see now is states move from the carrot of here’s all the information, please become compliant, to the stick, and, to the extent they can, going after ecommerce sellers,” he said.
He sees some states taking novel approaches to simplify compliance, if not their tax laws themselves. Alabama, for instance, has a notably complex web of municipal jurisdictions, but state officials have enacted a reform that permits out-of-state sellers simply to remit the total tax owed to the state, rather than having to deal each local taxing authority. Under that program, the state assumes the responsibility for apportioning out tax revenue to the localities.
Still, as whenever states are left to their own devices, the result of the sales-tax initiatives is a patchwork of laws and regulations that has left advocates calling for federal action to simplify the tax picture. It’s also left some, such as Maniace, suggesting that states could do more to encourage compliance and bring sellers out of the shadows by vowing not to aggressively pursue back taxes, fees and penalties.
“I think states have a role to play here too,” he said. “[They] could be doing more in offering amnesty,” he added, so that sellers could “come into compliance with an abject fear of being immediately being slapped with an audit assessment that’s going to cripple their business.”