B2B ecommerce was already a growing trend before COVID-19, but as many businesses were forced to shut down physical locations during pandemic lockdowns, the move to sell online accelerated the shift to ecommerce and B2C selling. The pandemic, coupled with changing tax laws, has affected how businesses report and remit taxes. B2B companies selling direct-to-consumers for the first time may be unfamiliar with the four-year-old tax law South Dakota v. Wayfair — and that could lead to costly consequences.
B2B companies may unwittingly violate tax law simply because some manufacturers and distributors are unaware of how the South Dakota v. Wayfair ruling applies to them. Noncompliance can cost millions of dollars.
In addition to the ongoing implications of the Wayfair decision, recent changes in tax-reporting regulations related to ecommerce are creating new tax-reporting responsibilities this year.
In June 2018, The United States Supreme Court ruled 5-4 in South Dakota v. Wayfair that states can require businesses without a physical presence in their state to collect and remit sales taxes. Most states now require sales tax collection among businesses doing $100,000 or more in online sales in their state. In California, New York and Texas, the threshold is $500,000.
Prior to the ruling, an online business or catalog had to collect sales tax on sales within that state and register and remit a sales tax return only if it had an in-state physical presence. If there was no physical location, there was no need to collect sales tax or file a sales-tax return.
Physical presence in a state includes brick-and-mortar locations, which includes any rented or owned property, employing remote workers (e.g., independent contractors, telecommuting employees, traveling representatives, and depending on the state, trade-show attendance), or storing property in a fulfillment center or location owned by your business, or owned and rented by someone else.
Sales tax nexus is the connection between a seller and a state that requires that seller to register to collect and remit sales tax in the state. B2B companies find it challenging to understand nexus because many sell in the supply chain, either selling raw materials or selling parts that are in the manufacturing process, says Silvia Aguirre, vice president of certificate management at tax software company Avalara.
“In most states, those transactions are tax-exempt,” Aguirre says. “If the product is typically taxable, but a firm has an exemption, then a business needs to have an exemption certificate from the buyer that proves you did not need to collect sales tax.”
45 states, the District of Columbia and Puerto Rico have a sales tax.
Determining whether transactions are tax-exempt is important because the first thing tax auditors will do is check to see if there are tax transactions where no tax was charged, Aguirre says.
Noncompliance can cost companies millions of dollars. And for businesses only now realizing they are not in compliance, a liability assessment and voluntary disclosure can reduce debt liabilities, Aguirre says. For example, sellers allowing buyers to indicate they are tax-exempt on their customer account profile is one way to keep track of compliance with the law.
Online selling and marketplaces
As of January 2022, individuals, partnerships, limited liability companies and corporations that earn more than $600 through online selling must file a “Form 1099-K, Payment Card and Third-Party Network Transaction,” through which that income will be reported to the Internal Revenue Service. As more businesses sell online, the number required to file 1099-K forms will likely increase considerably in the coming years.
Before January 2022, individuals who sold goods or services through platforms like Etsy or eBay, and others that use third-party transaction networks like PayPal, only filed a tax form if they completed at least 200 transactions worth an aggregate $20,000 or more. As a result of the American Rescue Plan Act of 2021, also called the COVID-19 Stimulus Package, that $20,000 threshold dropped to $600 with no minimum transaction level.
“All of a sudden, the sellers that will need to file is going to be a very big number,” Aguirre says.
Any sales within multiple channels, including marketplaces, require further documentation.
“It doesn’t matter what you’re selling,” Aguirre says.
Now, small and midsized companies must deal with the same problems that enterprise companies face.
“In the last year, we’ve seen [businesses] grow tremendously,” Aguirre says. “Adding on the Wayfair law and the COVID-19 explosion has created a complicated process.”
When selling on marketplaces, for example, the question is, “How do B2B companies connect the dots between the customer and the marketplace, and between the marketplace and the customer’s shopping cart?” Aguirre says.
Some marketplaces take care of tax-related details, or a business can decide to file themselves.
“If you’re on your own, that’s adding more complexity,” Aguirre says. “How are you going to reconcile all the deals? Businesses want to know if they should be charging shipping in their own sales because the marketplace is not doing it. So, it becomes an economic decision for companies.”
Don’t wing it
Businesses that have been selling wholesale and shift to direct-to-consumer sales on their own web property typically use tax-management software designed to keep sellers in sync with the latest tax laws and filing requirements, says Joe Cicman, senior analyst at research and advisory company Forrester.
“If you’re a smaller business that decides to wing it on your own, then I can see mistakes happening,” he says.
When advising clients, Cicman says bringing the finance department into the planning fold early on is key to avoiding any unwelcomed surprises.
“I’ve heard some rumblings from clients about going from a traditional first-party resale to a marketplace model because those revenue streams are coded differently,” he says. “But they need to bring the finance folks in earlier into those conversations, because if you bring them in the day before you launch on a marketplace, then there is going to be a lot of agitation.”
And with manufacturers and distributors, that is a problem, Avalara’s Aguirre says. Often, manufacturers and distributors don’t understand that, when moving to ecommerce, it is necessary to consider how to digitize the documentation process. For example, it can be easy to lose track of an increase in collecting tax-exemption certificates — sometimes tenfold to twentyfold.
“Any sales within the omnichannel, including marketplaces, requires further documentation,” Aguirre says. “It doesn’t matter what you’re selling, and if you’ve offered direct-to-customer transactions, you may have accrued four years of non-compliance.”