Consumers Have Moved From “Bricks” to “Clicks”
As the pandemic continues to ravage the U.S., the move from shopping in physical store locations to online continues to explode. As we enter the heart of the holiday shopping season, businesses have seen a steady climb in digital sales.
Holiday shoppers went online on Cyber Monday and spent $10.8 billion, setting a record for the largest U.S. internet shopping day ever, according to Adobe Analytics data. This was a 15.1% increase, year over year. Adobe now forecasts online sales for the entire holiday shopping season at $184 billion, which is a 30% increase from last year.
An obvious loser: Malls. Firms that track this sort of thin estimate in-store traffic declined between 48% (RetailNext) and 52% (Sensormatic Solutions) on Black Friday.
This Activity Greatly Increases Sellers’ Sales Tax Liability and Audit Risk
States take sales tax liability seriously. Many businesses likely face large and often unanticipated sales tax liability, including significant penalties and interest, in many states and municipalities. Also, most states hold business owners, and sometimes investors and employees personally liable (even when your business fails) … and may even bring criminal charges against business owners and their employees.
The pandemic has most states facing huge budget gaps as tax revenue collections continue to be way down. The Supreme Court’s decision in Wayfair in 2018, which eliminated the requirement that businesses have a physical location in a state to be liable for sales tax collections and remittance, has given states the authority to go after tens of thousands of businesses who reach a threshold of sales into their states (so-called “economic nexus”). The explosion of e-commerce and remote selling, especially during this holiday sales season, together with the economic nexus standard has many of these businesses facing business registration requirements and huge sales tax liability; and many are unaware of this.
To make things worse, several states may require remote sellers to register and start collecting sales tax as soon as they meet their economic nexus thresholds. For example, Alaska, California, Indiana, Maine, and Mississippi impose these requirements on the very next sale after nexus is established.
And many states are expected to go after business owners, investors, and employees for this liability … and even bring criminal actions in the most egregious cases.
Third-party Sellers on Marketplaces
Marketplace facilitator laws often don’t free marketplace sellers from all tax obligations. Many states require third-party sellers to register and file returns even when the marketplace collects and remits the tax. Monitoring online and other remote sales into all states (and even local jurisdictions in many states) is essential to avoid unwelcome notices from state departments of revenue. Understanding each state’s requirements from the start can help minimize surprises and compliance risk.
And more and more states are looking back to previous tax years to check on what might owe them. Out-of-state sellers are now dealing with more aggressive state sales tax collect-and-remit requirements and are increasingly pursuing sellers with goods in warehouses operated by large online marketplaces such as Amazon. Most retailers on these marketplaces that we have spoken to have no idea in which states or localities their goods are being warehoused by these marketplaces, and therefore don’t know where they might be liable for sales and even income taxes.
What To Do?
- Understand your business and sales tax risk-collection and remittance obligations. Get professional help.
- If you receive an audit notice, call your tax advisor.
- Work with sales tax experts and software providers who have particular expertise and specific content and tracking functionality to minimize risk and ensure accurate compliance.
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