In the five years since the U.S. Supreme Court’s landmark decision, the sales tax landscape has changed dramatically. Until there, link — the connection between a seller and the state that requires the seller to collect and remit sales tax there — was based on a physical presence in a given state. Taxes on e-commerce didn’t exist: many online purchases weren’t taxed, and life was much easier for Internet sellers (and cheaper for their customers).
But following the South Dakota v. Wayfair, Inc. in 2018, everything changed. This Supreme Court decision allowed states to create nexus requirements based on the amount of sales or number of transactions a seller conducts in a state, regardless of whether the seller or its products are actually located in that state.
Most states have taken advantage: at the time of writing, 46 states now have economic link laws. (Need to know if these laws apply to you? Check out the free Avalara guidewhich explains the economic link thresholds in each state.)
Different laws in different states add compliance concerns
This created significant compliance issues, and as more states continued to introduce e-commerce tax laws, the complexity only grew. What’s even more difficult is the fact that not only is sales tax different from state to state, but it can also be different. In a state too: Cities and counties often have their own taxes on top of the base state sales tax, which can make the whole thing a nightmare.
And merchants don’t just need to charge the right amount: They’re responsible for filing returns and disbursing funds to each state. (Fortunately, merchants do not have to file separate returns or send separate payments for cities and counties in these states.)
To add yet another obstacle, rules and regulations change frequently, so companies that thought they fulfilled their obligations may have an unpleasant surprise.
E-commerce continues to grow
Yet consumers have not turned away from online shopping, even as they have had to adapt to the idea of paying sales tax on their purchases. They actually made purchases more: According to International Trade Administrationglobal retail B2C e-commerce sales grew from approximately $3.3 trillion (USD) in 2019 to an expected $5.9 trillion in 2023.
While some of that increase can be attributed to the pandemic, it’s clear that the Wayfair decision hasn’t pushed merchants — or consumers — away from e-commerce. Today, WooCommerce has nearly 4 million live installs helping businesses of all sizes sell their products and services online.
Tax revenues are also booming
As online sales have increased, so have tax revenues — and economic nexus laws passed after Wayfair have proven to be a boon for states. The U.S. Government Accountability Office reports that states collected at least $23 billion from online sellers in 2022. That’s triple the amount collected in 2019, and nearly eight times what they reported from distance sales before Wayfair.
There’s a lot of money at stake when it comes to sales tax, and this growth comes at a time when overall tax revenue in many states is lagging. This means that states will likely aggressively protect this new source of revenue by strengthening controls and controls.
![business owner working on a calculator](https://woocommerce.com/wp-content/uploads/2023/09/blog-Accounting@2x.jpg)
The cost of audits, financial and others
While increased sales are good news, increased audits are not: an average sales tax audit costs more than US$300,000. (Avalara) But even for companies that don’t have this type of revenue, an audit can still be costly, because it’s not just about money. It was also about time. According to Avalara, whose tax solutions integrate seamlessly with WooCommerce, the process of a typical sales and use tax audit can take 30 to 45 days or more.
Facing an audit almost always means that businesses must spend time and resources on other tasks to respond to it, which can put a strain on the business, especially for smaller businesses. Combine that with potential financial penalties, and it’s easy to see why getting on top of sales tax is so important.
Global Sales Adds Responsibility for Global Compliance
Economic nexus is also not a concern limited to U.S. businesses: merchants located outside the United States are subject to state sales tax laws, even if they are not required to pay federal tax on income. Companies that sell in the United States must comply with the laws of the states where they sell. And merchants with inventory in a U.S. warehouse may also need to consider physical nexus.
Likewise, U.S. companies selling overseas need to think about their global tax obligations. Many countries require taxes to be collected once a certain threshold is reached, but a few have no threshold at all, meaning taxes on each sale must be collected and remitted.
What does all this mean to you?
E-commerce tax compliance can be time-consuming to process. Even if you’re already familiar with the concepts of economic nexus and e-commerce taxes (like many Woo merchants), you probably have questions. This is understandable: after all, you have better things to do than monitor current sales tax developments.
But let’s look at three key takeaways for your business as you move forward in this rapidly changing landscape.
1. E-commerce taxes likely to remain as complex and confusing as ever
The world of e-commerce taxes can be incredibly fluid – meaning that even if you keep your head above water now, there could be a big wave just on the horizon. A state could lower its threshold to the point where there would be an economic nexus when the law changed. Another state might start taxing the items you sell differently than before. Rates may change in a number of jurisdictions. And international regulations further increase the complexity.
Sales tax cases also continue to make their way through the courts: Earlier this year, the U.S. Supreme Court declined to hear a case arguing that a business located in North Carolina should not have to pay to the state $3.24 million in sales taxes and penalties for items that it sold out of state. (We can’t go into all the details here, but long story short, the company initially received materials out of state, transferred them to a carrier – also out of state – and then materials were finally delivered to customers. In the state. The state decided to tax those sales and won when the company sued.)
What will be the next big wave? Nobody knows. The only thing that’s certain when it comes to sales tax is that the waves will keep coming – and whether they’re big or small, any one of them can impact your business.
2. Many businesses will continue to have difficulty complying
Try to manually follow the regulations of different states and markets and then determine the correct amount of tax to charge on each transaction, and SO filing and remitting taxes in every jurisdiction – can be nearly impossible for businesses of any size. Small businesses often don’t have the resources to do this, while many medium and large businesses sell into too many marketplaces to handle it all on their own.
An Avalara survey of 1,000 companies in the US and UK illustrate the challenges: almost 40% of respondents do not believe they are fully compliant with economic nexus laws, with small businesses most uncertain. And only a little more than half said they might even explain all their online sales tax obligations (which could mean they are not meeting them). If you find tax laws complex and confusing, you’re not alone: 72% of respondents agree.
3. Technology is going to be even more important
WooCommerce doesn’t collect sales tax for you, but the power of our platform includes integrations that can help you stay on top of your tax compliance, right into the system you already use.
For example, Avalara AvaTax can handle everything from calculating sales tax in different jurisdictions to managing exemption certificates (for customers who don’t need to pay sales taxes or use taxes) . You can even automate the filing of returns and disbursement of payments. And if you sell globally, Avalara streamlines the calculation of customs duties, VAT, and more.
![Avalara WooCommerce Extension](https://woocommerce.com/wp-content/uploads/2023/09/blog-Avalara-Extension@2x.jpg)
With the right tools, you won’t need to stay on top of changing rules and regulations because the system will update automatically. You won’t need to worry about whether you’re charging the right amount of tax. And you won’t have to worry if you’re audited, because automation also significantly reduces the risk of tax errors in your transactions.
Another reason to rely on technology is the impact it can have on the rest of your business. In the Avalara survey, 33% of respondents said they use manual tools, such as spreadsheets and rate tables, to help them manage their tax compliance. Hand tools like this may look familiar, but they are prone to manual errors and are time-consuming to use and maintain. With automation, you not only reduce the risk of errors; you can increase the time you or your staff spend on more profitable initiatives.
Compliance should not be a barrier
While WooCommerce tools can help you make sales tax less stressful, it never will be. easy — especially if your business is looking to expand, enter new markets, or introduce new products. But with the right approach, the right solutions and the right partners, you can ensure that your compliance obligations don’t stand in the way of opportunities.
This article was written in partnership with Avalara. Oliver St. George is a senior partner marketing director at Avalara in fintech and commerce..
![Automate your sales tax with Avalara](https://woocommerce.com/wp-content/uploads/2021/10/cta-banner-avalara.png)