Scott Peterson jokes that his job title is so long, even he can’t remember it. He’s the Vice President of U.S. Tax Policy and Government Relations for Avalara, Inc., a team of tax experts and technologists simplifying tax compliance via automation. With 12 offices worldwide, Avalara offers cloud-based technology to help businesses manage sales, use, excise, GST, VAT, and other types of taxes.
Vision33’s Carl Lewis interviewed Scott on the Connected Enterprise Podcast about the recent acceleration of eCommerce, how sales tax has changed in the digital age, consumer use tax, and possible new tax exemptions.
The Acceleration of eCommerce
eCommerce has been growing steadily, but the COVID-19 pandemic essentially compressed five to six years of eCommerce progress into the last year. Quitting shopping wasn’t an option, so businesses and consumers shifted to an online environment. This wasn’t an issue for larger companies with existing eCommerce sites, but smaller companies setting up eCommerce for the first time struggled with collecting sales tax from customers thousands of miles away.
A 2018 Supreme Court decision comes into play here. Because of South Dakota vs. Wayfair, states can charge sales tax on all purchases, even if sellers don’t have a physical presence in the taxing state. (A good tip for businesses using eCommerce is that everything is taxable somewhere.)
Tangible vs. Intangible
Do you remember when the only way to buy CDs was at a music store? And books at a bookstore? CDs and books have always been taxable because they’re tangible – you can touch them. The laws in every state stipulate that tangible property is subject to sales tax unless specifically exempt.
But how does that work in the digital age? For 10 years, states have been changing their laws to apply tax to intangibles – anything delivered or accessed electronically. For example, electronic reading device manufacturers now need to collect sales tax on digital books downloaded to their devices.
Before the South Dakota vs. Wayfair ruling, people who sold merchandise strictly through marketplaces like Amazon had little to worry about regarding taxes and being audited, as long as the marketplaces collected the applicable taxes. Now, marketplace sellers need a sales tax license in certain states, but because every state is different, sellers must research state tax laws.
Consumer Use Tax
Consumer use tax is legally imposed on buyers, while sales tax is imposed on sellers. The consumer use tax exists because we have a long history of buying things from people who weren’t legally required to collect sales tax. A Florida retailer selling to someone in Connecticut, for example, didn't have to collect Connecticut sales tax (at least, until South Dakota vs. Wayfair). Connecticut, however, can require Connecticut buyers to pay the consumer use tax.
The consumer use tax significantly affects businesses, as most of the tax collected during audits is use tax. Scott says that in theory, if every retailer in the country collected sales tax perfectly on every transaction, the consumer use tax would go away. Since that’s unlikely, the consumer use tax will remain a burden and an audit risk for businesses.
Possible New Exemptions
Tax policy is constantly evolving, and many states are exploring social areas for exemptions. Some have introduced legislation to exempt gun safety equipment like locks and safes to reduce the hazards of gun ownership. Several states are considering exempting diapers and feminine hygiene products. A few states offer tax exemptions for purchasing and installing electric car charging stations.
Buyers will benefit from these exemptions, but they can complicate matters for sellers. If a state doesn’t clearly define an exemption – for example, which items constitute gun safety devices – or if a seller doesn’t set up their system perfectly, they could be at risk of an audit.
For more insights from Scott Peterson, listen to Vision33’s Connected Enterprise Podcast. Each week, host Carl Lewis interviews bright minds and industry thought leaders about enterprise technology and what’s coming next.