Navigating the Complex World of Sales Tax Compliance for E-commerce Businesses in 2024

The landscape of e-commerce sales tax compliance has become increasingly complex in 2024, with significant increases in audit activity from less than 1% to nearly 4% of businesses being audited and evolving regulations that continue to challenge online retailers. As states seek to increase revenue and ensure compliance post-Wayfair, understanding your sales tax obligations has never been more critical for e-commerce success.

The Current State of E-commerce Sales Tax Compliance

Sales tax compliance requires business owners to navigate a minefield of rules, regulations and deadlines, which vary widely between jurisdictions, creating an inordinately confusing process for business owners. With forty-five U.S. states and Washington D.C. collecting sales tax, and most states allowing local jurisdictions such as cities, counties and other “special taxing districts” to collect local sales taxes, the complexity is overwhelming for many e-commerce businesses.

The 2018 South Dakota v. Wayfair Supreme Court decision fundamentally changed how sales tax nexus works. The basic rule for collecting sales tax from online sales is: If your business has a physical presence, or “nexus”, in a state, you are typically required to collect applicable sales taxes from online customers in that state. However, in June of 2018, the U.S. Supreme Court issued a ruling that will likely change this exemption to collecting sales tax. States are expected to begin collecting sales taxes regardless of having a physical presence in the state.

Understanding Economic Nexus Thresholds

Currently, 25 states limit economic nexus to sales meeting a dollar threshold (e.g., $200,000). Others, however, require that marketplace facilitators and remote sellers collect and remit sales taxes if either a dollar threshold is met or the seller conducts a certain number of transactions in the state. Most states have a $100,000 sales revenue threshold, but some like Alabama ($250,000), California ($500,000), and New York ($500,000) have higher limits. In addition to sales revenue, several states also have transaction volume thresholds, typically 200 transactions.

Recent changes in 2024 have simplified some requirements. In 2023, both Louisiana and South Dakota removed the 200 transactions requirement from the economic nexus threshold, streamlining compliance requirements for small sellers. This is following the lead of a few states that removed the transaction requirement in 2022.

Rising Audit Activity and Compliance Risks

One of the most concerning trends in 2024 is the dramatic increase in sales tax audits. This spike likely comes as states look to increase revenue after reporting losses in 2023. We’ve seen many state Departments of Revenue posting more auditor job openings. California and Illinois have always been audit hot spots, and that remains true. The number of audits in these two states continues to climb. In addition, Wisconsin and Washington are also ramping up audits.

Mishandling sales taxes can lead to penalties, back taxes, and interest. It can even put your business at risk. This makes working with experienced professionals increasingly important for e-commerce businesses of all sizes.

Key Compliance Challenges for E-commerce Businesses

Several specific areas require careful attention in 2024:

• Product Taxability: Some states may exempt necessities like groceries or clothing from sales tax, while others may impose tax on these items. Digital goods, such as software or streaming services, can also have different tax treatments compared to physical goods.
• Marketplace Facilitator Laws: If you sell on these platforms as part of your e-commerce business model, your customers are paying sales tax on every transaction in accordance with their state’s rate. However, if those same customers purchase through your website, they may not be subject to tax unless your sales in their state exceed the nexus thresholds.
• Use Tax Exposure: The most common use tax exposure relates to bigger purchases like furniture, software, and fulfillment services where sales tax wasn’t paid. Consider reviewing expenses to identify any outstanding use tax obligations.

Best Practices for Staying Compliant

Successfully managing e-commerce sales tax compliance involves strategy and attention to detail. Key recommendations include:

• Regular Monitoring: Frequently check your sales figures in each state to avoid unexpectedly exceeding economic nexus thresholds. Review your sales data at least quarterly, if not monthly or more often. This allows you to identify states where you may be approaching the thresholds and take steps to comply.
• Automation Tools: Sales tax automation software like TaxJar and Avalara can streamline tracking economic nexus thresholds across multiple states. These solutions integrate with your sales platforms and automatically calculate your sales data for each state’s rules. This eliminates manual effort and provides real-time visibility into your nexus obligations.
• Professional Guidance: Check with a tax authority, small business tax expert or certified public accountant (CPA) to determine how much sales tax you may need to collect.

Getting Professional Help

Given the complexity and rising enforcement activity, many e-commerce businesses are turning to professional tax services for help. All County Tax Resolution, with offices in New York and Pennsylvania, provides comprehensive accounting and tax services to businesses navigating these complex requirements. If you’re looking for a firm that will focus on your individual needs, and always treat you like a client who matters, look no further. Our firm is large enough to offer a full range of professional services, but small enough to give you the individual attention that you deserve.

For businesses in the Montrose area and beyond, working with an experienced accountant montrose can provide the expertise needed to navigate sales tax compliance requirements while focusing on growing your business.

Looking Ahead

Businesses must be prepared for the diverse approaches that countries, states, and jurisdictions may adopt and remain adaptable enough to implement new tax rates swiftly when laws change. For businesses selling in multiple locations, these changes could happen hundreds of times a year.

The key to success in 2024’s compliance environment is staying proactive rather than reactive. This isn’t a situation where you wait for a state where you have established a new nexus to contact you about last quarter’s e-commerce sales tax. They won’t let you off the hook because you say you did not know. In fact, they may not contact you at all until some time later after costly penalties have piled up.

E-commerce businesses that invest in proper sales tax compliance systems, maintain accurate records, and work with qualified professionals will be best positioned to thrive in this increasingly complex regulatory environment. The cost of compliance is far less than the potential penalties and business disruption that can result from non-compliance.