Rapid rise of online sales could trigger new sales tax collection requirements for sellers
- Nov 20, 2020 | Gail Cole
Ecommerce sales in the United States increased by more than 37% year over year during the third quarter of 2020, according to new data from the U.S. Census Bureau. That means nearly $1 out of every $5 spent between July 1 and September 30 was spent online. The fourth quarter could see even more impressive gains, given the holidays and the fact that Amazon moved its 2020 Prime Day sales event from July to October this year.
Furthermore, winter has brought a resurgence of coronavirus infections, and with it a new round of restrictions on in-person shopping. Retail stores in California and Washington must limit capacity to 25%, and several other states are capping capacity at 50%. This as we move into the busiest shopping period of the year.
Thus, though many consumers will undoubtedly shop in person when and where they can in the coming weeks, more shoppers than usual are likely to spend more online.
Black Friday mission creep
Black Friday has been experiencing mission creep for years. First it was Friday. Then stores started offering deals Thursday night and even Thanksgiving Day. Then the sales bled into the weekend and Cyber Monday was born. Now, what was once primarily an in-store event has “transitioned more into a digital affair,” according to GlobalData Retail analysis.
CNN notes that “This year, the Black Friday deals that are usually reserved for in-store shopping will appear online during the month.” Indeed, Walmart started offering deals online November 4 and plans to release new deals online the Wednesday before Thanksgiving. At Target, “It’s Black Friday all month with new deals each week.” Amazon’s Black Friday sales start today, November 20.
Monitoring online sales in all states is essential
Omnichannel retailers that sell through marketplaces as well as their own ecommerce stores may experience a surge in business as a result of these extended sales. While exciting, this can also lead to new sales tax collection obligations.
Many marketplace facilitators are required to collect and remit sales tax on behalf of their third-party sellers in most states. However, states may still require some marketplace sellers to register with the state and file returns.
43 states, the District of Columbia, and some cities and boroughs in Alaska now enforce economic nexus laws, meaning they require businesses making a certain amount of sales in the state to register then collect and remit the applicable sales and use taxes. Economic nexus laws affect businesses with no physical presence in these states* (aka remote sellers).
With the exception of Kansas, where making just one sale in the state can establish economic nexus, all states provide safe harbor for small businesses. In Alabama, economic nexus is triggered once a remote seller makes $250,000 sales in the state. In New York, a remote seller must make $500,000 in sales and 100 transactions to create economic nexus. Economic nexus thresholds vary by state; state-specific details can be found in this state-by-state guide to economic nexus laws.
Here’s the kicker: Several states may require remote sellers to register and start collecting sales tax as soon as they meet the economic nexus threshold. As in, on the very next sale. These include Alaska, California, Indiana, Maine, and Mississippi. Other states are more generous: Hawaii gives sellers until the first of the month after meeting the threshold; Minnesota gives sellers up to 60 days to register.
Even during the busiest days of the holiday shopping season — perhaps especially during the busiest periods — retailers should track sales in all states with economic nexus laws. It’s important to know if and when an economic nexus threshold is met.
States are increasingly strapped for revenue thanks to the ongoing pandemic. Consequently, though they’ve been easing into enforcement of economic nexus, which represents an enormous change for businesses, states are under intensifying pressure to increase sales tax audits on remote sellers. Taking a Sales Tax Risk Assessment can help you determine your state sales tax obligations.
Looking for ways to improve your customers’ experience in the coming weeks? Get 10 tips for successful selling in the 2020 holiday season.
*Having physical presence in the state also triggers nexus and an obligation to collect.