In life, there are two certainties: taxes and death. While both incite deep feelings of unease, fortunately for everyone (author included), this article is only going to delve into the former. And the timing couldn’t be better as 2019 brings with it more updates and potential action items when it comes to nexus laws and the impact they will have—one way or another—for all online or interstate businesses.
A brief background on nexus: It wasn’t all that long ago that states required sales tax from businesses that occupied a “physical presence” in that given state. This meant that online retailers weren’t obligated or required to charge sales tax on out of state transactions due to these laws. And this offered a significant advantage over traditional brick-and-mortar retailers.
Also referenced as “sufficient physical presence,” nexus is the legal term applied to a requirement for companies that conduct business in a state to essentially collect and pay tax on all sales occurring within that state. In other words, if you sell goods or services in Philadelphia, then you are required by law to file and pay Pennsylvania state taxes. Sounds simple enough, right?
Well, alas, those were significantly simpler times.
Today, the ecommerce industry emerges as a significant player in the national (and global) economy and here comes the certainty part: this economic nexus sets into motion natural addendums to existing sales tax collection obligations. This move provokes cheers from classic brick-and-mortar retailers who have long felt the burn from online retailers perceivably sweeping up business, but jeers from online retailers who see nexus as a ball and chain—a burden—that they will need to effectively and continually manage to stay compliant and avoid the tax man’s unrelenting repercussions when and if they don’t.
More recently: There was a precedent set by Quill Corp v. North Dakota that essentially declared that retailers, online or otherwise, needed to have a physical presence before that state mandated that sales tax be charged to people living within that state who make purchases. However, a new case—South Dakota v. Wayfair, Inc.—effectively overturned this decision citing that “physical presence” wasn’t specific enough: it’s in fact the “economic presence” that predicates sales tax. Essentially the Wayfair ruling says that provided you meet the state-you-do-transactional-business-in’s “economic threshold” for revenue or transactions, you’re on the proverbial hook to collect and pay that state’s sales tax.
Since the US Supreme Court sided with South Dakota, this means Wayfair (and every other company doing business in multiple states) can no longer allow retailers to only pay sales tax in the state where they are physically positioned to do business.
Now, because of the Wayfair ruling, retailers of all locations and sizes, online or otherwise, will need to take a hard look at their own sales tax policies and will no longer be able to leverage “physical presence”. While South Dakota may be one of the first in line, other states’ decisions are on the docket for review, just waiting to be formalized, changing sales tax compliance forever more. And it brings a whole new set of impact for retailers. Let’s explore 3 of these potential pain points and some action items to help mitigate injury:
- Nexus is complicated to manage.
With over 10K unique tax jurisdictions in the US, the onus of designating the states you technically have economic nexus in (thus meeting the state’s threshold), is on you. This means you will need to register in each state you wish to do business in then begin collecting and paying sales tax in those states and this could (or perhaps not) be significantly more than you are currently tending to.
Action Item: Pepperjam’s Ascend™ platform can show you tax reports based on state. You can filter your publisher applications by state (if you don’t want to pay taxes in that publisher’s home-base state, you can simply decide not to pursue the relationship). The platform also allows publishers to easily submit an affidavit and annual certification of no solicitation which you can review, accept or reject. You will need to stay informed on all the rates and any applicable tax changes (and it’s just a matter of time before there will be changes) in all the states you do transactional business in. Additionally, brushing up on these individual state’s tax filing schedules will help to ensure there aren’t any penalties or late fees tacked on (read: additional headache).
- Managing sales tax to ensure compliance is expensive.
The sheer volume of boxes that need to be ticked in the sales tax compliance game can be overwhelming and unrealistic for many businesses who are simply not big enough or equipped with these box tickers already in-house. With increases in sales tax to collect and pay, deadlines to meet and policies to stay on top of, outsourcing may be a solid bet. However, smaller businesses may feel the burn of increased overhead costs compounded with having to pay more tax. Larger businesses will simply need to absorb these costs (think: magnates like Walmart, Amazon and Wayfair) or figure out ways that balance the deficit from across the organization (read: budget cuts for all).
Unfortunately, smaller to medium-sized businesses will likely see the short-term solution impacting the one factor they work so hard to mitigate stress on: the consumer. Price increases on products will likely be the fall guy when it comes to balancing—and the consumer will be the one left, ironically, holding the bag.
Action item: Determine which group your business lives in (small, medium or large) and seek the advice of both your legal and finance teams (or resources) to figure out the go-forward plan that best suits the needs of the business and the consumer.
- More money, more problems (potentially).
A fact of multi-jurisdiction commerce is that with an increased amount of sales to collect and pay tax on means an increased opportunity to make miscalculations or miss a deadline, thus increasing the chance of being flagged for the random, yet dreaded, audit.
Action Item: Always be aware of the way sales tax calculations are programmed in your point of sale (POS) systems, run routine tax software updates, keep copious inventory records and make certain the book keeper is eyes wide open on all things sales tax. Keep in mind, ignorance is no excuse for the law, so also ensure nexus law education is up-to-date and ongoing for anyone it’s relevant to.
The big takeaway?
There is significant impact on affiliate marketing because depending on state law, a relationship with a publisher in that state, may constitute nexus. And while state law continues to evolve, Pepperjam makes it easy on marketers by providing the right tools to help mitigate and manage the process.
No one likes or wants to pay more tax and extending the nexus law to cover multiple jurisdictions is a nightmare for any size business. And while larger companies can rely on expanding in-house to help mitigate the noise, this isn’t always an option for smaller businesses who want to remain thriving and competitive in the industry. Remember life’s two certainties and do your best to maximize the resources you have available to ensure the right people are doing the right things when it comes to sales tax compliance.
For even more information, you can check out our tools that support Nexus here.