How states can accurately and efficiently collect online sales taxes in the wake of the Wayfair decision
The decision of the S. Dakota v. Wayfair, Inc. Supreme Court ruling in 2018 gave states the power to mandate that remote sellers collect sales tax for goods sold into their state. While the decision made it possible for states to increase tax revenue by billions of
For many taxing authorities, the stark increase in the number of businesses that owe sales tax in their state poses a series of challenges from a logistical and financial perspective. And, while the technology exists today to help states accurately collect online sales tax, there must first be a shift in how states approach and handle tax collection.
The challenges for states in a post-Wayfair world
Most states currently do not think of interfacing with taxpayers in large volumes. Until the Wayfair decision, the volume of tax collection meant that states only had to interact with individuals and businesses on a one-to-one basis. Because of this, the collection processes that exist today were built around this mentality. With the drastic increase in internet businesses that now have to collect and pay sales tax, the returns systems that were created with an individual in mind can no longer handle the demand created by businesses that need to file thousands of returns at one time.
New sales tax collection requirements also pose challenges for states when it comes to staffing. In a perfect world, all returns can be submitted online, but this assumes that every taxpayer and business is able to do so. In reality, a typical taxpayer will call the taxing authority to have another person walk them through the returns process. If only half of the thousands of businesses that now have to collect remote sales tax have to call the state for assistance, the number of trained representatives needed to serve the new demand would need to dramatically expand overnight.
The benefits of outsourcing to technology providers
Fortunately, taxing authorities have the option to outsource technology for online sales tax to streamline the process for businesses to calculate, collect, report and pay the sales tax they owe. Established in 2000, the Streamlined Sales and Use Tax Agreement (SST) allows states to leverage tax automation software without building out an internal IT architecture or having to drastically increase their staff to handle taxpayer calls. Under this arrangement, technology companies known as Certified Service Providers (CSPs) provide tax technology services directly to businesses, alleviating their tax compliance burden, while states pay for these services. And, for states unable to change their taxing definitions to formally participate in the SST program, they still have the option to work with CSPs to help remote sellers pay sales tax in the state.
The benefit of using CSPs or participating in the SST program for states comes in the form of cost-savings, political capital, and preparation for the future:
- Paying for Tech Saves Money—Leveraging the program can actually save the state authorities money—literally and politically. The use of CSPs makes it easier for businesses to pay their sales tax, which allows states to pay as returns are submitted instead of having the financial and internal infrastructure burden of taking individual phone calls from taxpayers or auditing each business that fails to comply with new regulations. In reality, many states do not have the capacity to audit more than a few hundred people at any given time, so auditing thousands of new taxpayers is virtually impossible.
- CSPs Lessen Political Liability—Putting finances aside, audits are also costly from a political perspective. The negative impacts of audits stretch beyond the individual being audited and can easily muddy the water with entire communities and organizations. From a legal standpoint, it’s only a matter of time before we see a lawsuit that challenges the complexity and cost placed on remote sellers collecting sales tax. By participating in the SST program or contracting with a CSP, states are providing a solution that addresses the core issues businesses are facing and that could potentially prompt a lawsuit.
States also stand to benefit from the goodwill that this program offers to businesses. Following the Wayfair decision, many online sellers have found it to be extremely difficult to sustain their operations without increasing prices, cutting staff, or taking a material hit to their profitability. While businesses still have to collect the additional sales tax, the financial burden of paying that tax back to the states is waived and the inconvenience of manually doing so is removed.
- Working with Tech Providers Prepares for the Future—The use of CSPs as “on-demand” tax technology providers also stand to put states in a position to adopt new forms of tax collection in the future. Countries like Spain have already begun implementing real-time audits, which requires businesses to document every transaction and report them to the government daily. In the U.K., the Making Tax Digital initiative is a major step toward using tax technology for online reporting and ending the concept of the tax return as businesses know it. While we are still years from real-time auditing being a reality in the U.S., it’s important that states start preparing. The technology being used today will not be equipped to handle the tax requirements of tomorrow, but it’s a necessary stepping stone to keep pace with innovation. As states make their way toward the taxation methods of the future, technology will no longer be an option, but a requirement to handle changing tax requirements.
The Wayfair decision opened the door for states to collect billions in new sales tax revenue, but with that opportunity comes its own set of challenges. The tax collection infrastructure and processes of the past are no longer sufficient to handle the volume of returns states will be handling from remote sellers. Technology is the key for states to accurately and efficiently collect online sales tax today and will lay the foundation for states to keep pace with the changes that are coming. By participating in the SST program or leveraging CSPs, states stand to recoup the online sales tax revenue owed them while enabling businesses to easily and cost-efficiently stay compliant.
Scott Peterson is the vice president of U.S. tax policy and government relations at Avalara.