Special Report: How COVID-19 is changing business sales tax obligations and enhancing risk [Part 9]

States Are Seeing Increased Sales Tax Revenues; More Businesses Facing Sales Tax Compliance Risk

COVID-19 is changing the way we do business, the way we buy, the way we sell — and how all of this affects businesses of all sizes and industries as well as their customers.

Greetings from my home office in NYC. It’s my Week 9 covering COVID-19 changing the way you and I literally live our lives. I’m sincerely hopeful you and your families are safe and well. In this week’s installment of my special report covers how this crisis is impacting businesses, buyers and the tax landscape. You can see more COVID-19 related blogs here.

The pandemic’s impact of sales tax revenue

Even as states and municipalities across the nation are estimating they will need as much as $750B to shore up revenue shortfalls and expense increases, primarily related to the COVID-19 pandemic, we are seeing that the explosion in e-commerce since early March is resulting in a significant increase in sales tax revenues in many states.

Many well-placed professionals in states around the country that impose a sales tax indicate that sales tax collections from online sellers is significantly higher than it was during a similar period in 2019. Sales tax revenue is up as much 30% and more in some states. This has been the one bright spot for state tax revenue collections during the pandemic.

What is driving this increase in sales tax revenue?

Since the SCOTUS’ decision in Wayfair, all but two of the states that impose sales tax have passed legislation and issued decrees imposing sales tax compliance requirements on remote online sellers based on economic nexus rather than physical presence. In addition, over 30 states have passed marketplace facilitator laws that require these “marketplaces” that are used by third-party online sellers to collect and remit sales tax.

As I have reported before, shopping behavior changed dramatically as the pandemic spread across the U.S. and brick and mortar stores were ordered to close, many retailers and others quickly adopted new strategies and establish or greatly expand their online selling presence and capabilities.

Adobe® Analytics has reported that U.S. online sales increased 49% in April over the prior year.

Many consumer surveys show that the shift to online shopping will continue at least as long as COVID-19 remains a threat. A survey of 1,200 consumers in late March 2020 by research and consulting firm Retail Systems Research found that 45% expected online shopping would be a necessity for them during the crisis.

Streamlined Sales and Use Tax Agreement states

According to Craig Johnson, executive director of the Streamlined Sales Tax Governing Board Inc., an increase is being seen in the states who have provided final first quarter 2020 tax collections information. These reports show sales tax revenue increases that range from 25% to 100% compared to the first quarter of 2019.

Mr. Johnson indicated that the number of sellers registered through the streamlined registration system has increased from 5700 in the first quarter of 2019 to over 10,000 active sellers today.

What does all this mean to you and your business?

As more and more online businesses sell into new states and municipalities and increase their number of sales and sales revenues into those areas so that they meet economic nexus thresholds in those states, they become subject to sales tax collection and remittance rules in those states. For many of these businesses, sales tax compliance hasn’t been a consideration or even something that hasn’t even occurred to them. The result is likely to be a significant increase in risk and expense, particularly in cases where sales tax compliance has been ignored or done inaccurately. Many of these remote sellers will be targets for state sales tax audits with potential liability — not only for sales tax liability, but penalties and interest, too.

It is critical for these businesses to consult with their tax advisers as soon as possible and make certain they are performing their due diligence to determine where they do have economic nexus for sales tax compliance purposes and making certain they are registering in those states and properly complying with sales tax collection and remittance obligations.