Although compliance differences in state tax regimes have traditionally not been a barrier to effective business tax conformity, such as in the case of income taxation, this cannot be said of the present state of sales tax after the June 2018 Wayfair ruling. On Tuesday, several small businesses urged Congress to take action and develop unified tax measures to deal with the current compliance stress and burden, as well as the cost and disparity of rules adopted by states post-Wayfair. This regulatory spiderweb is catching not only small businesses but also medium and large ones, including e-commerce marketplaces facilitating cross-border sales. This is bound to get worse in the near future, as thresholds continue to change with little notice and some states propose aggressive retroactive collection rules.
U.S. States: A Complicated History
To say that compliance under the historic decision is complicated would be an understatement. With each state implementing its own rules, thresholds and reporting requirements, businesses of all sizes face massive compliance challenges that will cost them a lot of time and money to solve.
Those alignment challenges equate to a sort of informal double tax on online retailers — one being the actual taxes levied through the Wayfair decision and then the added costs of compliance and navigating regulatory uncertainty, which is creating mounting inequities and solvency issues. For many, this added burden will surely create immediate financial distress, but ultimately, significant economic implications that could lead to state and national fiscal inefficiencies.
Complexity for All Business Sizes
E-Commerce merchants want to comply but can’t without the resources to calculate and collect state and local taxes in thousands of jurisdictions across the country.
This uncertainty and increasing risk will embrace all types of companies. Mid-sized and large businesses must deal with the issues of complying with the myriad of new rules as well. They may have more tools at their disposal than small businesses, but that doesn’t make the complexity of compliance any simpler.
When navigating the uncertainty of where, how and what information to report, businesses face a non-compliance audit risk that might result in stiff penalties that could disrupt operations and profits.
While the general outcome of the Wayfair decision is relatively simple — businesses without a physical presence in a state that meet a certain threshold are required to collect and remit taxes — the implementation of disparate rules compliance requirements brought on a maelstrom for online retailers.
Technology & Automation: The Key to Solving the Challenge
There is no easy way to tackle this right now and it doesn’t look like the federal government is going to act any time soon, as any potential intervention will demand legal and constitutional balance, so online retailers need to harness technology to make their lives easier and compliance less burdensome.
Tax automation will be key to this challenge, as it simultaneously allows for improved accuracy by eliminating manual processes and creating an audit trail.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.