- As businesses continue capitalizing on the opportunities ecommerce provides, governments worldwide are updating tax regulations to secure their share of the revenue.
- Leaders in the tax and finance departments need to prepare for complexity around regulatory changes, omnichannel transactions and multi-jurisdictional sales in order to stay compliant.
- Companies setting up new sales channels and entering new markets should pay attention to economic nexus, marketplace facilitator laws and the evolving definitions of digital goods and services.
The other day, I woke up in the same room that I call my office, scrolled Amazon Prime Day deals and opted into free two-day shipping from companies across the country. All in all, a pretty banal day — except when you consider that in the not-so-distant past, most of those details were completely atypical. It’s a whole new world out there for commerce — and tax regimes are working determinedly to catch up.
In a recent conference session from the CFO Leadership Council (CFOLC), panelists discussed the current tax compliance landscape, namely the complexity around omnichannel transactions, multi-jurisdictional sales and the associated regulatory changes. In this article, we’ll overview the main insights from the panel, what they mean for businesses and how finance leaders can ensure they stay compliant.
Top Takeaways From Tax Experts
1. Economic nexus is the new focus
The definition of nexus is shifting — and not just due to remote work or the introduction of “Nexus Events” in the new “Loki” TV series. No, the shift in definition — and its implications — started in 2018 with the South Dakota v. Wayfair Supreme Court case. Essentially, the Court ruled that states may charge tax on purchases from out-of-state sellers even if the seller doesn’t have a physical presence in the taxing state.
The repercussions of that decision continue today, with all states now taxing online sales and the final few passing the updated regulation in the past year. However, the drastic rise in ecommerce as a result of the pandemic means the definition of nexus will likely shift even further from the traditional physical nexus — to the economic nexus created by sales in a given state.
“We are just getting warmed up [in terms of complexity], because we’re going to start to see states shift their corporate income taxes to sales-only,” said Scott Peterson, VP of government relations at Avalara. “And then they’ll use the Wayfair case to make an economic nexus for businesses in their state based on sales.”
For your business, this requires knowing which states you’re selling to, whether sales there are direct or through a marketplace, and the state’s respective regulations around those sales. See our state-by-state breakdown of economic nexus thresholds by state below.
“If you’re a multi-channel business, you need to start with the assumption that you have nexus everywhere and then figure out where you don’t have nexus,” said Peterson. “The way to protect yourself is to assume, ‘Okay, I have every tax in the world I have to do something about. Now let me figure out which ones I don’t have to do something about.’”
“You need to start with the assumption that you have nexus everywhere and then figure out where you don’t have nexus.”
Sellers have been operating in an unofficial grace period for economic nexus laws since they became widespread in 2018, but those days are coming to an end. With revenue departments facing more pressure to increase audits, some states have already issued warnings to remote sellers about impending enforcement measures. And some are being quite blunt about their intent: In October, Kansas Revenue Secretary Mark Burghart said the department intends to go after noncompliant remote sellers, starting with large ones before moving on to small sellers.
“The effort Kansas just announced is just the beginning of state remote seller enforcement actions,” said Peterson. “Most state budgets are in trouble because of the recession, and two years have gone by since the Wayfair decision was issued.”
Mark Friedlich, senior principal at Wolters Kluwer Tax & Accounting, echoed Peterson’s sentiment in an interview with Accounting Today, calling economic nexus compliance “fertile territory for tax auditors.” Jamie Yesnowitz, national tax practice leader at Grant Thornton LLP, further solidified the prediction, telling Bloomberg Tax she expects more concentrated efforts and aggressive auditing from states as the pandemic passes.
Though they were only passed recently, these economic nexus laws are subject to change — and likely will — based on the continued rise of ecommerce. Those possible changes, plus the expected enforcement, will require diligent monitoring from businesses aiming to remain compliant.
2. Marketplace laws require your attention now
If you thought that last section didn’t affect you because you sell through a marketplace, some bad news: State laws around marketplace facilitators, also known as marketplace providers, are getting more complex as the number of transactions going through them continues growing quickly.
Selling through a marketplace can foster a sense of complacency since many states have begun requiring the facilitator — rather than the seller — to handle collecting and remitting sales and use tax. Several states instituted this in an attempt to reduce the confusion of innumerable sellers on a single marketplace having to figure out sales and use tax, registration, nexus and other requirements.
However, these regulations vary significantly state-by-state and are evolving quickly, so don’t assume you know the rules. It becomes especially complicated when a seller has multiple channels, e.g., a brick-and mortar location, ecommerce site and marketplace presence. For instance, some states require that you include marketplace sales in your overall calculation of economic nexus in the state. So if you have $50,000 in gross sales to Pennsylvania from your ecommerce site and $55,000 in gross sales to Pennsylvania from marketplaces, you have an economic nexus there. But if you had the same breakdown in gross sales in Louisiana, you wouldn’t have nexus, as marketplace sales don’t count toward the state’s $100,000 threshold. Learn which states require you to count marketplace sales toward their economic nexus thresholds in the breakdown below.
To throw another wrench into things, the location in which a marketplace stores your product can trigger nexus in a state.
“If you do business on a marketplace that fulfills for you, they have your property stored somewhere,” Peterson said. “That is still your property. One of the things that is universal in the marketplace facilitator laws is the ownership of the property stays with the original seller. So if the marketplace stores in a warehouse in a state where that seller has no presence, the seller has nexus in that state. That may create an income tax obligation, and it very likely would eliminate any kind of economic nexus protection you have.”
“If the marketplace stores in a warehouse in a state where that seller has no presence, the seller has nexus in that state. That may create an income tax obligation, and it very likely would eliminate any kind of economic nexus protection you have.”
Unfortunately, there’s no simple way to navigate the complexities of evolving marketplace regulations. With requirements for marketplace facilitators varying greatly by state and continuing to shift, businesses must look at their interactions with their marketplaces through the lens of overall sales and operations to ensure compliance.
3. “Digital goods and services” are getting new definitions — and increased taxability
The panelists noted increasingly complex definitions and taxability of “digital goods and services.” State taxes, most of which were introduced in the 1930s, have historically only covered tangible goods. Now that streaming movies have trumped DVDs and the cloud replaced floppy disks, states are changing their rules to get their share of intangible goods sales.
“We’re seeing a great deal of activity from a legislative perspective on adding new definitions to what ‘digital goods or services’ might be,” said Faranak Naghavi, a tax partner at EY. “Once that definition is out there, there’s challenges around that because oftentimes the definitions are not very clear. Just in the U.S. alone, you have tens of thousands of jurisdictions that can come up with their own rates or rules or changes. So somehow, you have to keep track of these changes.”
“We’re seeing a great deal of activity from a legislative perspective on adding new definitions to what ‘digital goods or services’ might be. … Somehow, you have to keep track of these changes.”
Currently, taxing digital goods and services in the U.S. is complicated by the fact that states do not adhere to universal definitions, nor do they tax all digital goods and services the same. About a quarter of states abide by the Streamlined Sales Tax Project’s (SSTP) definition of “specified digital goods;” approximately a third define digital goods on their own terms; and over a third don’t specifically define digital goods for sales tax purposes. Currently, about 30 states tax at least some digital goods and services, and about 16 generally exempt digital goods and services from sales tax. The remaining four don’t have a state sales tax.
Signs of the incoming changes are starting to manifest. In June 2020, Rhode Island passed H. 7532, expanding the sales tax base to computer software and streaming services. In March, Maryland, which previously didn’t have a definition of digital goods for tax purposes, passed a law dictating that its 6% sales and use tax would be applied to specified digital products including e-books, streaming movies, sound files and software-as-a-service (SaaS). This, according to Naghavi, makes it imperative that CFOs cement the right infrastructure, people and plan to handle the changes coming their way.
4. Real-time reporting and collection systems are coming to the U.S.
In a recent paper, a global collection of tax commissioners and administration officials from the Organisation for Economic Co-operation and Development (OECD) Forum on Tax Administration outlined a new model for digital tax administration. The idea of cross-border taxes on digital goods and services isn’t new: The U.K., Italy, Hungary, Poland, China, Russia and Argentina already charge value-added taxes measured in real time. The unified model, however, is new and would significantly help with compliance.
This global movement toward real-time reporting and collections systems signifies a fundamental change in how tax-related information is collected and exchanged. While the approach varies by country, the general shift is that instead of companies pushing information to tax authorities, tax authorities will pull information straight from businesses’ enterprise resource planning (ERP) and other internal financial systems in real time.
Companies doing business internationally have likely already experienced the implications of digital tax administration, and those selling solely in the U.S. won’t be exempt from real-time payments and collections for long.
“I think [the requirement for real-time payments and compliance] could come any second now,” said Peterson. “The challenge isn’t the ability to do it. The challenge is the political will to make it a requirement. So, if [the government] tells us they want to start getting transactions every day, we’ll have real-time transactions in the United States.”
“I think [the requirement for real-time payments and compliance] could come any second now.”
And that political will is building, simply due to the government wanting to tax a new major revenue stream. However, several factors are likely accelerating the timeline, according to the CFOLC panelists. There is pressure to keep up with countries already making the move.
As states look to replenish their revenues, they’re also looking to get their pieces of the pie as quickly as possible. We’ve seen many efforts to accelerate payments from states like Minnesota, Michigan, Ohio and Pennsylvania: Each requires a monthly payment once a taxpayer surpasses a certain threshold.
However, the recent enactment of Massachusetts’s accelerated sales tax payment provision is likely the most “real-time” initiative to date. The legislation implementation consists of two phases over four years; the first began this month, at the start of the state fiscal year. Businesses that collected and remitted more than $150,000 in sales tax or room occupancy and meals tax in the prior fiscal year will need to start remitting collections from the first three weeks of each month in the final week of the same month. In phase two, starting in July 2024, all retailers will pass sales tax information to their credit card processors, and the processors will remit sales tax on credit card and other electronic transactions daily.
Similar proposals for real-time sales tax remittance have become ubiquitous in state legislatures around the country, yet they tend to include less extreme, monthly due dates or get vetoed completely. Massachusetts could beckon other states to follow it in a similar fashion, particularly if its efforts are successful. States might also want to make more certain of revenue collection — consider the way tax authorities worldwide are fighting value-added tax fraud and bringing in billions in unpaid taxes. And lastly, states have money from the American Rescue Plan Act (ARPA), which many will likely use to implement computerized real-time reporting and collection.
For businesses, this move is going to pack a punch. Ninety-two percent of respondents in Deloitte’s 2021 Tax Transformation Trends Survey said digital tax administration will have a moderate or high impact on tax operations and resources, as they’ll have to update their tax-tracking software and systems if states upgrade to real-time collection.
As governments look to move faster on tax administration, companies need to prepare — now.
5. Tax is no longer just a back-office concern
Taxes are one of the largest expenses at any company, yet they’re historically an afterthought in strategic planning. The need to go digital, coupled with the sheer number of and far-ranging changes in government policies, has changed that. Tax has been elevated to a critical component of a company’s service and product delivery strategies.
“Ten to twenty years ago, tax was this back-office thing you didn’t want to think about,” said Ross Tennenbaum, CFO of Avalara. “Now, it’s part of the magic moment of commerce. It’s part of the strategy. It’s part of how you do business.”
The Deloitte survey also illustrated how tax is becoming an integral part of broader business strategy: Sixty-five percent of tax leaders said their teams will need to give deeper advisory support on digital business models over the next two years. Forty-nine percent said the same for supply chain restructuring, and 48% expect more demand for advisors on sustainability.
With tax-related risks, opportunities and realities impacting everything from technology selection to where companies can sell, the tax team will need to take a more collaborative, advisory role over the coming years.
Other Tax Resources From NetSuite
Make sure your business complies with indirect and transactional tax obligations with our tool that determines and calculates taxes across jurisdictions (U.S., VAT countries, Brazil and India).
Depending on their residences and roles, remote workers could create an economic nexus — and unanticipated filing responsibilities for your business. We’ll cover the scenarios to watch out for.
Take a break from compliance headaches and get the lowdown on some tax deductions you may be overlooking and able to take advantage of.
Action Items: What the Tax Trends Mean for Your Business
The CFOLC panelists recommended several strategies for staying compliant in the fast-changing tax realm:
Only reacting to current financial, disclosure and reputational tax risks without considering the long-term is a potential pitfall.
“We [tend to] start off by trying to solve the problem that’s right in front of us, without keeping in the back of our mind that there’s going to be another problem,” said Naghavi. “And the first problem that you’re trying to deal with is probably the solution to the next one. No one imagines just how big and broad things can get.”
Consider your growth plans, and adopt solutions that reflect those ambitions.
“Don’t think about just an immediate solution to take care of your needs when you know they’re going to change and grow,” Naghavi continued. “You’re going to outgrow that solution and have to go to something else.”
Talk to your marketplace facilitators
In marketplaces, ensuring your business is compliant requires conversations around all tax-related issues, including where your product will be stored and which entity is responsible for collecting and remitting sales tax. Legal documents should reflect the consensus of these conversations, to protect the seller if issues arise.
“For the assumption [that the marketplace is handling compliance] to be made, there has to be the right legal agreements in place,” said Naghavi. “Firstly, the states have to support that model to make sure that the seller is off the hook and protected. If the state has those provisions, then there have to be agreements between the marketplace facilitators and the marketplace sellers to protect the rights of the seller.”
Large marketplaces have generic seller agreements that are very detailed about tax collection issues; the marketplace usually handles them. As a seller, you likely signed such an agreement early on and should contact seller support with any issues.
Consider all causes of nexus
Remember, nexus doesn’t just arise from sales within a state. It can come from employees, stored inventory, an affiliate and even temporarily doing physical business in a state for a trade show. Look at the full picture when considering nexus.
In addition to governments internationally — and perhaps soon, domestically — using ERP systems to pull tax-related information, research indicates ERP improves the strategic capability of tax. Participants in that Deloitte Tax Trends Survey noted that simplifying data management would be essential if tax were to play a more proactive, strategic role in the organization — and responses suggest that ERP facilitates the former. Fifty-six percent of tax teams that consider themselves “far along” in introducing advanced ERP systems to simplify data management are also highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of advanced ERP said the same.
Integrate tax with the rest of your organization
Integrating tax with other areas of the business in an advisory capacity will help avoid unpleasant compliance-related surprises down the line. For instance, the CFO and team personnel need to work alongside the marketing, IT, supply chain and ecommerce heads to choose systems that can handle tax requirements. And tax needs to be in sync with HR to advise on the implications of hiring in various locations.
In tax compliance, cleaning up issues is more expensive and time-intensive than adhering to rules from the get-go. So be proactive, especially when expanding to new markets, products and sales channels. Understand current tax requirements and any planned developments before setting up a remote or physical shop.
Here’s our guide to economic nexus thresholds for out-of-state businesses:
Economic Nexus Thresholds for Out-of-State BusinessesThresholds that include marketplace sales are marked with an asterisk (*). Other thresholds do not include marketplace sales.
|Alabama||Threshold: Total retail sales of more than $250,000 in tangible personal property per year|
|Alaska||Alaska doesn’t have a sales tax. However, under the Remote Seller Tax Code, local municipalities can choose to enforce economic nexus. The threshold for that would be statewide gross sales of goods, property or products delivered into the state or services in excess of $100,000 or 200 transactions. This does include marketplace sales. Here’s the latest list of municipalities that have adopted economic nexus.|
|Arizona||Threshold: The gross sales generated from direct sales in a year is more than $100,000|
|Arkansas||Threshold: Sale of tangible personal property, taxable services, digital codes or specified digital products exceeding $100,000 or 200 transactions in a year|
|California||Threshold*: Gross sales of tangible personal property exceeding $500,000 in a year|
|Colorado||Threshold: Retail sales of tangible personal property, commodities, or services that exceed $100,000 in a year|
|Connecticut||Threshold*: Gross receipts from tangible personal property or services of at least $100,000 AND 200 or more retail transactions in a year|
|Delaware||N/A. No sales tax.|
|Florida||Threshold: Taxable sales of tangible personal property delivered physically into the state exceeding $100,000 in a year. Taxable services aren’t included in the threshold. Note: Florida’s economic nexus ruling just went live on July 1.|
|Georgia||Threshold: Retailers with more than $100,000 of tangible or intangible personal property sales or over 200 transactions in a year|
|Hawaii||Threshold*: Gross income or gross proceeds of tangible personal property, intangible property, or services exceeding $100,000 or 200 transactions|
|Idaho||Threshold*: Cumulative gross receipts from sales including taxable products and taxable services exceeding $100,000|
|Illinois||Threshold: Cumulative gross receipts from sales of tangible personal property or services exceeding $100,000 or 200 transactions|
|Indiana||Threshold: Gross revenue from sales of tangible personal property, electronically delivered products and services exceeding $100,000 or 200 transactions|
|Iowa||Threshold*: Gross revenue from sales of tangible personal property, specified electronically delivered products and services exceeding $100,000|
|Kansas||Threshold: Cumulative gross receipt from sales exceeding $100,000. Note: It’s unclear whether marketplace sales are included in this threshold. Also note that Kansas’s economic nexus ruling just went live on July 1.|
|Kentucky||Threshold*: Gross receipts from sales of tangible personal property or digital property exceeding $100,000 or 200 transactions. Taxable services aren’t included.|
|Louisiana||Threshold: Gross revenue from sales of products, electronically transferred products, or services exceeding $100,000 or 200 transactions|
|Maine||Threshold: Gross sales of tangible personal property and taxable services in excess of $100,000 or 200 transactions|
|Maryland||Threshold*: Gross revenue from sales of tangible personal property or taxable services exceeding $100,000 or 200 transactions in a year|
|Massachusetts||Threshold: Gross sales of tangible personal property and services exceeds $100,000 in a year. This doesn’t include sales made through a collecting marketplace, though sellers should include those made through a non-collecting marketplace.|
|Michigan||Threshold*: Gross sales of tangible personal property or taxable services delivered into the state exceeding $100,000 or 200 transactions in a year|
|Minnesota||Threshold*: Retail sales and taxable services exceed $100,000 or 200 sales in a year|
|Mississippi||Threshold: Gross sales of tangible goods or services exceed $250,000 in a year.|
|Missouri||Pending. As of publication, the Missouri House and Senate passed a bill that proposed a $100,000 economic nexus threshold to take effect in 2023. The governor is expected to sign it into law.|
|Montana||N/A. No sales tax.|
|Nebraska||Threshold*: When retail sales exceed $100,000 or 200 transactions in a year|
|Nevada||Threshold*: Gross revenue from retail sales of tangible personal property into the state exceeding $100,000 or 200 transactions in a year. Services aren’t included.|
|New Hampshire||N/A. No sales tax.|
|New Jersey||Threshold*: Gross revenue of tangible personal property, specified digital products or taxable services in excess of $100,000 or 200 transactions in a year|
|New Mexico||Threshold: Total taxable gross receipts from sales, leases and licenses of tangible personal property exceeding $100,000 in a year. This threshold also includes sales of licenses and services of licenses for use of real property.|
|New York||Threshold*: Cumulative total gross receipts from sales of tangible personal property of over $500,000 AND 100 transactions in a year. Note: SaaS is considered tangible personal property in New York.|
|North Carolina||Threshold*: Gross sales in excess of $100,000 or 200 transactions|
|North Dakota||Threshold: Over $100,000 in gross taxable sales of tangible personal property and other items into the state, including taxable services|
|Ohio||Threshold*: More than $100,000 in gross sales or over 200 transactions|
|Oklahoma||Threshold: Aggregate sales of taxable tangible personal property exceeding $100,000. Services aren’t included in the threshold.|
|Oregon||N/A. No sales tax.|
|Pennsylvania||Threshold*: Gross sales of products and services over $100,000|
|Rhode Island||Threshold*: Gross revenue from sales of tangible personal property, prewritten computer software delivered electronically or by load and leave, vendor-hosted prewritten computer software, specified digital products and/or taxable services in excess or $100,000 or 200 transactions|
|South Carolina||Threshold*: Gross revenue from sales of tangible personal property, electronically transferred products or services in excess of $100,000|
|South Dakota||Threshold*: Gross revenue from sales of tangible personal property, electronically delivered products or services in excess of $100,000 or 200 transactions|
|Tennessee||Threshold: Retail sales in excess of $100,000|
|Texas||Threshold*: Gross revenue from sales of tangible personal property and services exceeding $500,000|
|Utah||Threshold: Gross revenue from the sales of tangible personal property, any product transferred electronically or services exceeding $100,000 or 200 transactions|
|Vermont||Threshold*: Sales of tangible personal property, products transferred electronically or services exceeding $100,000 or 200 transactions|
|Virginia||Threshold: Gross revenue from retail sales and taxable services in excess of $100,000 or 200 transactions|
|Washington||Threshold*: More than $100,000 in combined gross receipts|
|Washington, D.C.||Threshold*: Gross receipts from all retail sales exceeding $100,000 or 200 transactions|
|West Virginia||Threshold*: Over $100,000 in gross sales of tangible personal property or services or more than 200 transactions|
|Wisconsin||Threshold: Annual gross sales of tangible personal property and services exceeding $100,000. Marketplace sales are included toward the threshold for individual sellers, but if all sales are made through a marketplace that is collecting, the individual seller isn’t required to register.|
|Wyoming||Threshold: Gross revenue from sales of tangible personal property, admissions or services exceeding $100,000 or 200 transactions|