Two years after Wayfair, where are we now with online sales tax? Fear, anxiety, and noncompliance.
Immediately following the Supreme Court ruling in the landmark Wayfair ruling, dozens of states enacted laws or regulations requiring online sellers from other states to collect and remit sales taxes.
In the two years since, many of those same states have moved to impose tax-collection requirements on marketplaces like Amazon and Etsy, while many smaller sellers have been uncertain and fearful about their own tax responsibilities, according to Charles Maniace, vice president of regulatory analysis and design at Sovos, a sales-tax software provider.
“Within minutes of the Wayfair decision taking place, a number of states had already had on their books laws or rules or regulations which adopted an economic nexus standard,” Maniace said in an interview.
That process, he said, was “faster than I’ve seen states move on anything in the history of sales tax.”
States such as Vermont and Hawaii were ready to jump out of the gate as soon as the high court issued a ruling granting states the authority to collect taxes from out-of-state sellers, overturning more than 25 years of precedent. Those states had laws or rules on the books that contained trigger mechanisms that would automatically spring into effect on a court ruling such as the Wayfair case, which in turn prompted a rapid domino effect.
“And then all the other states really, really quickly fell in line,” Maniace said.
In short order, every state with a sales tax, save for Florida and Missouri, had new rules on the books setting parameters that would trigger an economic nexus for out-of-state sellers, determining what volume of sales or revenue would make them liable for collecting taxes.
Then came another broad set of initiatives to extend sales-tax obligations to marketplaces like eBay and Etsy, what became known as marketplace facilitator laws.
“We call it the ‘Wayfair second wave,'” Maniace said. “Now [almost] every state that has an economic nexus law also has a marketplace facilitator law.”
It’s hard to overstate the impact of those laws on sellers and high-volume buyers alike.
Buyers, for instance, particularly high-volume, corporate consumers, now have to rely on their vendors to calculate taxes, inviting the possibility of underpaying or “paying too much tax to sellers who are overcharging because they don’t know the rules,” Maniace said. “And that’s just money out the door.”
For tax-software providers like Sovos, the answer is obvious, and they are energetic boosters of efforts to automate tax processes like collection, remission and auditing.
But for smaller sellers, the sudden burden of having to track and collect taxes in dozens of states and thousands of jurisdictions has been daunting, to say the least. As Maniace surveys the landscape today, he sees thousands of sellers who have responded to the new tax laws and equipped their shops with software to handle collections and payments. But he also observes that there remains an untold but significant number of sellers that have avoided becoming complaint owing in part to the complexity of the nationwide tax picture, but also “for fear of past liability.”
“I still think that the tail of compliance is really long, and there are lots of ecommerce sellers that aren’t compliant, and some of them are scared out of their wits,” he said.
Those fears might not be totally misplaced.
“There was definitely a grace period for a while, where most states were more interested in bringing companies into compliance rather than looking backwards and trying to gain revenue from past transactions,” Maniace said.
“What we’re starting to see now is states move from the carrot of here’s all the information, please become compliant, to the stick, and, to the extent they can, going after ecommerce sellers,” he said.
He sees some states taking novel approaches to simplify compliance, if not their tax laws themselves. Alabama, for instance, has a notably complex web of municipal jurisdictions, but state officials have enacted a reform that permits out-of-state sellers simply to remit the total tax owed to the state, rather than having to deal each local taxing authority. Under that program, the state assumes the responsibility for apportioning out tax revenue to the localities.
Still, as whenever states are left to their own devices, the result of the sales-tax initiatives is a patchwork of laws and regulations that has left advocates calling for federal action to simplify the tax picture. It’s also left some, such as Maniace, suggesting that states could do more to encourage compliance and bring sellers out of the shadows by vowing not to aggressively pursue back taxes, fees and penalties.
“I think states have a role to play here too,” he said. “[They] could be doing more in offering amnesty,” he added, so that sellers could “come into compliance with an abject fear of being immediately being slapped with an audit assessment that’s going to cripple their business.”
It is worse for sellers who travel out-of-state to sell at shows or conventions and may already have tax accounts in multiple states. Washington state, for example, extends the Business and Occupation tax to cover online sales to Washington from the seller’s home state if the seller also has a physical nexus. Some states have set low dollar or transaction thresholds. More than a year ago the Wall Street Journal pointed out that the Wayfair criteria should have been adjusted for population. California has 45 times the population of South Dakota, but initially they imposed and then retroactively dropped the 200 transaction criteria. Vendors of sales tax software is not affordable for smaller sellers, but that may not matter, because states are unlikely to be able to find them while they remain in business.
Could you address the retroactive application of the sales tax laws that e-commerce sellers fear? Is this only for the two-year period since the Wayfair decision (or when states changed the laws)? What is the current status of Florida & Missouri? What states do not have marketplace facilitator laws?
There is a whole other layer to this mess that I am dealing with as a Canadian seller.
When I sell to a US buyer in a state that has sales tax and has “signed up” or however it works with ebay, the buyer gets charged the tax – shows on the invoice I send but I don’t get the funds – thank goodness, but Paypal gets it and sends it to ebay. Sounds fine on the surface but I have several issues that I cannot get addressed……..surprise surprise!
I know it is the same for US sellers, but I am furious that I have to pay the Paypal money transaction fee on the sales tax – that should be paid by ebay! They charge it and they remit it – this is nothing more than offloading their obligation onto the seller.
Another issue is a actually much more serious. I recently had to make an adjustment on a customer’s already paid for order. I removed one item and because they purchased another item I was calculating the cost of the second order – minimal additional postage once I packed up together and one piece from 1st order was removed. When I was playing with the numbers something didn’t look right. The buyer was in NC and the original ebay invoice showed state tax of 5%. GUESS WHAT – when I did the calculation I found that the amount of tax charged was in excess of 8%.
Is it possible that ebay is scamming the sales tax collection ????
I have contacted ebay c/s and been told they will send this to the tax department who will contact me. Not holding my breath!
The explanation I received from c/s when I questioned the incorrect calculation is that 5% is the base sales tax in NC but local taxes can increase the amount up to 7.something percent…..all well and good but still not up to the over 8% the customer was charged AND if that is true, why does the percentage number on the invoice not show as the actual amount of tax being charged.
I have had many emails from customers questioning the “miscalculation” of their tax and can only tell them to contact ebay for clarification. I know that most won’t bother for a buck or 2 here or there – and cynically, I’m sure ebay knows the same thing.
Several issues here: #1 as a seller you don’t know the rules per state. I’m seeing some Etsy sales collecting tax on shipping, others not. If I search that State’s rules I can’t determine which it’s supposed to be.
#2 The 1099K issued by Etsy & PayPal(and others) to the Feds includes everything. It’s up to the seller to subtract the sales tax that has been collected by the marketplace. For Etsy, this means going through all invoices to list what was collected as sales tax. Etsy does not list sales tax on any of their (many) reports. The “Tax” column is left blank.
#3 Etsy does not issue any confirmation to the seller of the amount of tax collected or statement that those taxes have been paid. Should the IRS demand confirmation–what are you supposed to use? All you have is your invoice. There is no proof or confirmation.
And how many States are screaming about how budget shortfalls are destroying them and blaming the Federal Government for not giving them more money — but nowhere do we hear anything about how much OUT OF STATE sales tax revenue has been (and is being) collected from all these post-Wayfair transactions, that have created an unanticipated WINDFALL for states ?
How much has revenue that has been generated by out-of-state sales taxes could be used to offset the deficits caused by poor management in states with budget shortfalls? Is anybody saying? (At the beginning of this year New York was about $3Billion in the red, which amount of course has ballooned out of sight due to Covid.)
I live in New York and nobody has even heard a whisper about this new (since last June) source of $-MILLIONS! Guess we will have to wait (at least) until after the election? Isn’t it great to have millions coming in that you can slip into the General Fund (or wherever) and not say anything about this WINDFALL to the public ?
Even worse, ebay’s MP collect sales tax AND charges 11.5% interest on it plus from what I hear they get a discount from states they collect for, little double dipping. On top of that, I can’t get a straight answer to whether or not sales tax will be reported on the 1099K, reps on ebay’s board said they get back to us, call in(which took 4 hrs to call me back) said yes but ebay’s tax page say yes and no.
Sales tax collected by eBay will not be reported on the 1099-K:
See the eBay help page article titled “eBay and Form 1099-K”
“Starting in 2019, any sales tax collected by eBay on sales made by you in the various marketplace states will not be on your Form 1099-K. This is because eBay automatically collects and remits such sales tax directly to the state (i.e. the sales tax for these states isn’t paid to you).”
But in the paragraph above it states:
Form 1099-K includes the gross amount of payments made to you within a calendar year, so refunds, shipping costs, sales tax, etc. aren’t subtracted from the total amount. This means that the amount reported on your Form 1099-K may not be fully reportable on your tax return. You should consult with your tax advisor to determine how best to use the information on your Form 1099-K
So both paragraphs contradict each other, even ebay reps can’t comfirm
They shouldn’t be able to go after back taxes because they didn’t have those laws in place. How is a business supposed to comply with laws that didn’t exist?
There’s no need for a third-party service to do taxes because there’s no reason states should be doing things the way they are. Each state should be collecting from its own sellers alone, just expanding their collection to all of their customers rather than just those who reside in their state.
I really have to question the intelligence (or at least the integrity) of these lawmakers. Either they’re too stupid to see they’ve got it all backwards or they’re too unscrupulous that they intentionally did it this way so their buddies (third party services) could cash in, too.