How to simplify local sales tax compliance in the post-Wayfair world
Local sales tax compliance is a common pain point for businesses, especially small businesses, required to collect and remit sales tax in multiple states. To understand why, the United States House of Representatives Committee on Small Business Subcommittee on Economic Growth, Tax, and Capital Access recently invited four representatives from the small business community to discuss the matter.
Managing sales tax became more complex for many businesses after the U.S. Supreme Court overruled the physical presence rule in South Dakota v. Wayfair, Inc. (June 21, 2018). Prior to the Wayfair ruling, sales taxes were collected primarily by businesses with a physical presence in the state. Local sales taxes were collected primarily by businesses located in the jurisdiction.
Wayfair enables states to tax out-of-state businesses that make sales — but have no physical presence — in the state; this is economic nexus.
Today, 43 states (plus Washington, D.C.) have economic nexus. Of those states, 36 have local sales and use taxes in addition to the state sales tax. There are more than 12,000 tax jurisdictions nationwide.
The state tax authority in most states oversees the administration and collection of state and local sales and use taxes. In home-rule states, however, local governments may administer their own local sales and use taxes. As a result, businesses may have to register, file returns, and remit taxes to multiple tax authorities.
This is enormously burdensome for businesses that manage sales tax manually.
What states are doing to simplify compliance for remote sellers
States aren’t unsympathetic. Indeed, some recognize they must simplify tax compliance for remote sellers, in one way or another.
Single tax rate for remote sellers in Alabama, Texas, and Louisiana
In the home-rule state of Alabama, the Department of Revenue allows remote sellers to apply to collect, remit, and report a Simplified Sellers Use Tax — currently a flat 8% on all sales into the state.
Texas adopted a similar strategy, though it doesn’t allow home rule. Remote sellers with economic nexus may apply to collect and remit a flat, single local use tax rate rather than the various individual rates in effect in each tax jurisdiction. This can greatly simplify compliance for companies that sell throughout the Lone Star State, which has more than 1,500 tax jurisdictions.
The Louisiana Department of Revenue currently allows remote sellers to voluntarily apply to file a Direct Marketer Sales Tax Return. This enables them to collect a flat combined rate (currently 8.45%) via one centralized return.
Single point of remittance in Alaska, Colorado, and Louisiana
So that businesses won’t have to register, file returns, or remit taxes to numerous local governments, the Alaska Municipal League created streamlined, single-level administration of sales tax collection and remittance. It’s governed by the Alaska Remote Sellers Sales Tax Commission, which encourages remote retailers to automate sales tax collection and remittance.
A similar simplified system is under development in Colorado, where there are close to 100 self-administered jurisdictions. A law enacted last year requires the creation of an electronic sales and use tax simplification system to facilitate the Department of Revenue’s collection and remittance of state and local sales tax. Though it doesn’t mandate participation by home-rule jurisdictions, it does encourage them to voluntarily participate within three years.
Colorado is also considering ways to help remote sellers determine the correct rate to charge.
Finally, the Louisiana Sales and Use Tax Commission for Remote Sellers is building a system that will allow remote sellers to file a single return and remit a single payment for the state and all parishes. It’s expected to be up and running by July 1, 2020, when Louisiana is to begin enforcing economic nexus (the last of the 43 states to do so).
Lawmakers in Louisiana are also considering legislation that would establish a commission for remote sellers within the Department of Revenue. It would oversee the administration and collection of state and local sales and use tax by remote sellers.
These simplification measures aren’t being created in a vacuum. They’re modeled, more or less, on the Streamlined Sales and Use Tax Agreement (SST), which mandates a central, electronic registration system, state administration of sales and use tax collections, and more.
For businesses that qualify as a volunteer seller, SST states also help offset the cost of automating sales tax compliance with certified service providers, or CSPs. Several non-SST states are offering or creating similar CSP programs.
Should Congress intervene?
Congress had ample opportunities to dictate how states could tax remote sales prior to the June 2018 Wayfair ruling. Indeed, states begged them to. Yet despite the introduction of numerous bills, Congress was unable to reach consensus. Bills proposed since Wayfair have also hit a dead end.
The Small Business Subcommittee hearing held on March 3 was an effort to revive the issue. Assuming dealing with the COVID-19 pandemic doesn’t take precedence, a Senate committee will hold a Wayfair hearing soon. They'll likely look to federally mandate simplification measures. Since Congress is comprised of representatives from states, that could be a hard sell.
And they may not be needed. As described above, states are already taking it upon themselves to simplify sales tax collection and remittance for remote sellers. More states could look to partner with CSPs. States could also amend their economic nexus laws: California, Iowa, North Dakota, and Washington already eliminated their transaction threshold to give safe harbor for more small sellers, and Wisconsin is looking to do so now.
States scrambled to get economic nexus laws up and running as quickly as possible after the June 2018 Wayfair decision. Many states now are realizing the easier it is for remote retailers to comply with economic nexus, the more likely they are to do so.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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