PYMNTS-MonitorEdge-May-2024

Where The Tax Man Will Knock Louder Post-Wayfair — And Sooner

The tax man looms across state and international borders, searching for digitally derived dollars due — scanning sites, platforms and even pop-up stores.

For retailers and other firms, there’s the persistent lure of broadened reach into new markets. However, as has been the case in so much of eCommerce, venturing into new geographies means companies must grapple with a host of new issues. Depending on how far afield they expand, those issues can span currencies, locally preferred payment methods and, increasingly, taxes.

Last year, in the case of South Dakota v. Wayfair, Inc., the Supreme Court ruled that online retailers could be mandated to pay sales tax — and taxes can be levied by states on firms that do not have a physical presence in those states.

As previously noted in this space, tax policy remains fragmented, due in part to “economic nexus” laws on the books — which can vary, depending on the states where firms sell goods and services through online channels. That means they must navigate tax collection nuances.

In an interview with Karen Webster, Liz Armbruester, SVP of global compliance at Avalara, said that despite companies’ best efforts, keeping up to date and compliant with a shifting tax landscape has been an uneven process. She brings a unique perspective to the issue — her team sees the tax returns filed by eCommerce players, and helps them understand where they might be at risk of receiving an unexpected love letter from their state and local taxing authorities.

“Businesses are out there doing their best to get this right — and sometimes, they don’t get it right,” she told Webster. These firms may be selling in 15 or 20 states where, previously, their purview had been just two or three states. “Now, there is a big delta of knowledge they need in order to be tax-compliant,” said Armbruester.

That delta comes as firms find it is no longer enough to just maintain a tax table or database to help decide if and when tax is applicable (where, just a few years ago, online sales were tax-free). They must now apply tax rules to inventory, and keep track of the 43 (and counting) economic nexuses that, ultimately, have an impact on bottom lines.

Knock, Knock: It’s The Friendly Neighborhood Auditor

Nobody wants the auditor to come knocking — but they will, no doubt.

Get ready for more letters from the IRS and other taxation authorities, warned Armbruester. It turns out that — thus far, in a post-Wayfair world — the governments are not getting the revenues they had expected.

That shortfall can be traced, in part, to leniency extended to online merchants as they acclimate to new laws — such as extensions of SCA implementations seen across the pond, as various merchants and others scramble to get compliant. It’s a tax collection leniency that will be short-lived, Armbruester predicted, adding that authorities will turn the tables and become more aggressive.

When tax authorities do train their sights on new sources of tax revenue, they are likely to focus more on online marketplaces. “They’ll say, ‘Hey, marketplace facilitator, you’re doing a lot of business here, so let’s talk.’ And we are in the beginning phases of that transition,” Armbruester said. She noted that automation of tax compliance, as provided by Avalara, can help prevent the fines and penalties that loom when revenue becomes the key driver for state and local governments.

Some Advice

Generally speaking, according to Armbruester, eCommerce firms can get their arms around new (and changing) tax policies by getting a good grip on inventory — where it is held, where it is sold online and, ultimately, where it is delivered — so they can be as accurate as possible. Pop-up stores — where, for instance, consumers may find locations and pay for goods on Instagram — offer an example of just how carefully merchants must consider the tax implications of how they do sales across channels.

Looking ahead, Armbruester said U.S. tax authorities are likely to take a cue from Brazil and other nations, where digital taxation has moved ever closer to the transaction. She noted that, currently in the U.S., tax remittance generally takes place within a 30-day window — and that window is likely to get smaller. It’s a consideration that firms outside the U.S., that want to target these shores as a new market, will have to mull.

“You really do have to have this holistic view of tax — excise tax and usage taxes,” Armbruester told Webster of the new, post-Wayfair landscape, “and it’s an ever-changing puzzle.”

PYMNTS-MonitorEdge-May-2024