The Wayfair Effect on Black Friday and Cyber Monday Salesby
By all accounts, sales records were smashed over the Thanksgiving weekend. That’s great for bottom lines, but it could create new and ongoing sales tax collection requirements for your retail clients.
A high volume of sales over the five-day Thanksgiving weekend shopping period could put many retailers in the black. It could also tip an out-of-state seller into new sales tax collection obligations in one or more states — a requirement that would be ongoing.
Let’s look at the numbers: Thanksgiving Day sales exceeded $4 billion for the first time ever, Black Friday sales hit $7.4 billion, and Cyber Monday sales came in at a whopping $9.4 billion. (Cyber Monday sales in 2018 were $7.9 billion.) At Amazon alone, Cyber Monday saw more sales than any other day since the company’s birth, and businesses selling through the Amazon marketplace “sold more items during Cyber Monday 2019 than any other 24-hour period in the company’s history.”
Although brick-and-mortar store visits trended down in much of the United States over the holiday weekend, ecommerce sellers reached more consumers than ever before. Retailers with both an online presence and brick-and-mortar store that allow consumers to buy online and pick up in store did especially well — a trend that’s expected to continue in the coming weeks; it’s hard to beat near-instant gratification after a late-night online shopping spree.
Economic Nexus and High-Volume Holiday Sales
Businesses with a physical presence in a state have always had to collect and remit that state’s sales tax. But out-of-state businesses with no physical tie to a state (remote retailers) couldn’t be required to register until the Supreme Court of the United States issued its ruling in South Dakota v. Wayfair, Inc. (June 21, 2018).
In the post-Wayfair world, states have the authority to base a remote sales tax collection obligation entirely on economic nexus, and most do. This time last year, fewer than 20 states required remote retailers to collect and remit sales tax. This holiday season, 42 states enforce economic nexus, including the biggies: California, New York, and Texas. Number 43, Louisiana, will enforce it on or before July 1, 2020.
There are five states with no general sales tax, and in one of them — Alaska — municipalities are banding together to enforce economic nexus at the local level (Alaska allows local sales tax). Only Florida and Missouri have a statewide sales tax but no economic nexus law, and they’re likely to fall in eventually.
Not all remote sellers have to collect sales tax in all states where they make sales. All but one state with an economic nexus law, Kansas, allows an exception for small sellers: Remote sellers collect sales tax only after crossing the economic nexus threshold.
The problem, for retailers with customers across the United States, is that each state’s threshold is unique. For example, it’s $500,000 in annual sales in California, Tennessee, and Texas, but $500,000 in sales and 100 transactions in New York. It’s $250,000 in Alabama and Mississippi, and $100,000 or 200 transactions in many states.
That’s not even the fun part. Each state bases the threshold on different sales, so while in some states only taxable sales of tangible personal property are included, in others both taxable and exempt sales must be counted. Some states include services or digital goods in the threshold, others don’t, and so on.
Correctly determining whether economic nexus has been created in a given state requires no small amount of effort. But it can’t be overlooked — not even during the busy holiday season. Some states require a remote retailer to register as soon as the economic nexus threshold has been crossed, as in before the next sale. Picture that happening on Black Friday or Cyber Monday.
The Marketplace Advantage
If there’s a silver lining for retailers — and that’s a big if — it’s that marketplace facilitators are required to collect and remit sales tax on behalf of their third-party sellers in 37 states (and Washington, D.C.) and counting. Retailers that sell only through collecting marketplaces in those states may not need to register. Or they may, it depends on the state.
There can be different requirements for businesses that make both direct and marketplace sales in a state with a marketplace facilitator law. A seller with a high volume of direct sales will likely need to register, collect and remit sales tax, and file returns for those sales, if not for their marketplace sales — though marketplace sales may also need to be reported. State-specific details are available in this state-by-state guide to marketplace facilitator laws and state-by-state registration requirements for marketplace sellers.
Long-Lasting Consequences of Holiday Success
All these new collection requirements benefit states. According to the National Association of State Budget Officers, state sales tax revenue trended up in the 2019 fiscal year. Brick-and-mortar businesses that can’t sidestep sales tax also benefit when online sellers collect sales tax; the playing field is more level.
However, collecting sales tax in multiple states is a burden for sellers — a burden that will last for at least a year. Although sellers whose sales decrease below the economic nexus threshold in 2020 could eventually unregister and stop collecting (states have different rules about how soon that can happen), they’d need to reset the watch on their sales. If the threshold is crossed again, sales tax collection would have to resume. It may be simpler to simply keep collecting.
Manually collecting and remitting sales tax and filing returns in multiple states is untenable. It would necessitate tracking rate changes in 12,000+ jurisdictions, as well as rule changes and filing schedules in all the states and more.
Fortunately, businesses don’t have to manage sales tax alone: Automating sales tax collection, remittance and filing greatly eases the burden of sales tax compliance.
States that are members of the Streamlined Sales and Use Tax Agreement (SST) encourage remote businesses to contract with a Certified Service Provider (CSP) to perform most sales and use tax functions. There’s a similar CSP program in Pennsylvania, which isn’t an SST state, and there soon will be programs in several other states as well.
Gail Cole is a Senior Writer at Avalara. She’s on a mission to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals — or anyone interested in learning about tax compliance.