It’s now one year since the U.S. Supreme Court issued its historic ruling that gave states the right to require out-of-state sellers to collect and remit sales tax based solely on their economic connection to the state, regardless of whether the seller has any physical presence (people or property) there. The ramifications of this game-changing ruling are still unfolding, but it’s clear they will impact virtually all online retailers in one way or another.
The momentum to topple the time-honored physical presence standard, ultimately leading to the South Dakota v. Wayfair decision, was spurred in large part by the growing prominence of ecommerce and the ability of remote sellers to use technology to access a national market for their goods and services while maintaining a very small physical footprint. The Government Accountability Office estimated that in 2017 alone, states lost more than $13 billion in taxes they could not collect.
The scenario in the U.S. is similar to what businesses have been experiencing throughout Europe and South America, where growing value-added tax (VAT) gaps have prompted tax authorities to impose new (technology-enabled) tax compliance regulations directed at improving collections and decreasing fraud. No matter where in the world you may be located, sellers that are not meeting their tax compliance obligations face increased audit scrutiny and expanded liability.
Marketplaces and Payment Processors in the Crosshairs
The after-effects of the Wayfair ruling have put marketplace facilitators in the crosshairs, too. That includes companies like Amazon.com, eBay and Etsy, and to some extent, payment processors, like credit card companies, PayPal and Square.
The Supreme Court’s Wayfair decision put state governments on notice that tax obligations cannot be unduly burdensome, and the states’ immediate reaction was to enact new rules capturing remote commerce sales. However, many states have begun to think about ways to manage the administrative burden associated with registering a slew of new taxpayers, and streamlining how they might receive payments and process tax returns.
To that end, many states have given serious consideration to the role that marketplaces could play in enabling efficient tax collections. From a purely practical perspective, the services they offer to their customers causes them to know a great deal about a given sale, including what is being shipped, to whom it’s being shipped, and how much is being paid – the essential building blocks to an accurate tax calculation. From there, it wasn’t such a far stretch to consider the efficiencies that could be gained by requiring marketplaces to collect and remit tax for their remote-seller clients.
Since the Wayfair ruling, 29 states have already enacted rules or legislation creating such an obligation on marketplaces. Out of those 29 states, rules are effective and enforceable in 16 states, with 10 more set to go-live July 1. However, there is a pretty wide variance on how effectively each of these states have addressed the following important concerns for marketplaces and their client-sellers seeking to ensure continual compliance:
- The types of activities that make a marketplace facilitator obligated to collect and remit tax;
- The economic threshold above which the marketplace facilitator rule kicks in;
- Whether or not marketplace sellers can opt to collect tax on their own;
- Where legal liability sits for inaccurate collection;
- The manner in which the marketplace facilitator reports tax due and payable; and
- The reporting obligations of the marketplace seller,
We are squarely in a state of flux as states come to comprehend the downstream implications of using marketplaces as collectors and as efforts get underway to articulate a series of best practices.
Rules regarding payment processors are at a far earlier point on the curve than those for marketplaces and do not appear to have the same momentum. Last, year, the Massachusetts budget bill included language directing the Department of Revenue to evaluate how to design a system that would involve tax collection by payment processors.
Similar language appeared in bills this year, including in Connecticut and Missouri, but to-date no state has pulled the trigger. Supporters see this as an opportunity to close the time lag between the moment of sale and the time of tax remittance, while opponents question whether payment processors are equipped with the necessary information to make a proper tax calculation. They also highlight the administrative costs of taking in tax collections on a real-time basis compared to the one-time benefit of accelerated payments.
As states determine what to do, it may make sense for businesses to start taking actions into their own hands and prepare to address these possible compliance challenges proactively. And they don’t have to go it alone; they can use the experiences of businesses in other countries as a guide.
Take, for example, how Airbnb is addressing VAT requirements in Denmark. The company has published information for those renting their homes and apartments through the marketplace about the requirements for business licensing and how to register for VAT through Virk, the official Danish online portal for businesses.
Compliance Through Technology
Advances in technology have enabled sellers to reach a global market from a single location (that location sometimes being their sofa or garage). Likewise, technology can be a tool governments use to facilitate compliance.
Throughout Latin America, and starting now in Europe, governments are enacting rules requiring taxpayers provide transactional information in real or near-real time, sometimes even requiring invoices be pre-approved before goods ship. Having this data available as a means of ensuring the accuracy of subsequent tax filings and remittance has been enormously effective in closing the VAT gap.
Likewise, some countries have taken substantial steps to make tax compliance simple and streamlined. In the European Union, the Mini One Stop Shop (MOSS) provides a simplified mechanism for businesses supplying private customers (as opposed to other businesses) certain digital services (from either inside or outside the EU) to meet their VAT requirements. On January 2021, this simplified regime is slated to expand to include intra-EU sales of goods.
In some ways, MOSS looks a little like a (failed) proposal by former Rep. Bob Goodlatte (R., Va.). that sought to establish a form of tax clearinghouse, where tax would be collected based on rates determined by the buyer’s state, rules determined by the seller’s state, remitted to the sellers state and shared through the clearinghouse.
It’s unlikely (especially in the near term) that the U.S. will adopt a mechanism similar to MOSS. After all, at any point in recent history, Congress could have stepped into the question of sales tax collection from remote sellers but opted not to do so.
What seems far more likely is a continual change in the compliance landscape wherein states are constantly refining their laws and rules to improve their ability to validate the accuracy of tax filings (and levy penalties for any inaccuracy) and striving to find ways to improve their own efficiency.
In this landscape, U.S. states may start to see the value much of the rest of the world sees in real-time transactional information. In such a world, organizations should expect the unexpected and prepare for the inevitable: an increasingly complex compliance burden with substantial penalties for those who fail to live up to the challenge.
Sovos provides tax-compliance software.Favorite