by Liz Armbruester, SVP of Global Compliance at Avalara
It’s been more than four years since the US Supreme Court’s decision (South Dakota v. Wayfair), allowed states to tax remote sales — those made by businesses with no physical presence in the state.
Historically speaking, states have only been able to impose tax on businesses which meet a certain level of physical presence in-state. Following the Wayfair ruling in the Supreme Court, this is no longer the case. For international sellers that ship products to the US, it’s important to understand the sales tax registration and remittance requirement they may now have due to economic nexus rules.
UK businesses are now having to wrap their heads around these new requirements and seek tax advice as to each state’s specific threshold.
Wayfair implications on UK businesses
Many UK businesses selling to US customers have previously enjoyed exemption from local sales taxes by not having a physical presence there. But with the Wayfair ruling changing this, they should now consider their tax compliance with state requirements wherever their products or services are delivered. For example, if a UK seller has a US subsidiary, the UK seller is deemed to have a physical presence in the state and liable to US sales tax.
In light of this, UK companies need a detailed understanding of their US sales activity on a state-by-state basis, including the volume of revenue or number of transactions depending on the state.
But that’s just the beginning of the increased complexity. Many products are taxed differently in various jurisdictions. Items such as nutritional supplements, food, and cloud-based applications might be exempt in some states, taxed usually in others, and subject to special rates elsewhere, resulting in multiple different sales tax rate combinations in just one state.
It’s not just the additional regulatory pressures that makes US sales tax rules difficult to navigate. Merchants are now selling through new channels and using third-party logistics to serve customers, which makes it more difficult to manage tax requirements across systems in real-time.
The lack of uniformity and awareness is prompting businesses to plan ahead and act swiftly to comply with the changing tax rules and regulations for UK companies selling to US customers.
The digital way to compliance concerns
For many smaller firms, the realisation that tax is simply becoming too complex to manage on their own is hitting home. In response, many are turning to technology to help reduce the burden of compliance and comply with Wayfair-related laws. Currently, six in 10 US businesses (60%) are doing so, up from a low of 43% in March 2020, according to Avalara’s Wayfair Decision Tracking study.
For UK companies, following in the footsteps of those across the pond who are getting ahead of the compliance curve through technology adoption would be a smart move.
Companies must be supported by an automated tax compliance system that handles tax calculations and nexus obligations, registrations, returns, and tax-exempt sales across multiple jurisdictions. With automation, businesses can manage tax obligations as an extension of the other systems powering their operations — reducing the risk of noncompliance when selling through multiple channels. Furthermore, tax automation provides enhanced reporting functionalities that can simplify tax return preparation and filing.
In doing so, companies can better avoid costly mistakes in real-time, mitigate risks, and reduce the impact on the business by reviewing both their sales and use tax processes and their footprint for tax obligations.
As the past four years have shown us, the tax landscape has been dynamic and unpredictable in the wake of the Wayfair decision. There has never been a greater need for automated tax technology. Businesses can more easily stay on top of these shifting rules, regulations, and requirements with dynamic strategies that leverage the power of technology and automation for their compliance requirements.
Those organisations that take a proactive approach and embrace automated solutions can avoid increased costs from interest and penalty assessments and are better placed to handle the waves of changes coming now and further into the future.