States can reduce the cost of tax compliance for businesses with uniformity and tech

Whether it is changing consumer behavior or the 2018 Supreme Court decision in South Dakota v. Wayfair Inc., sales tax compliance has become increasingly complex for businesses in the last few years. All 45 states with sales tax require remote sellers to collect sales tax, while at the same time, ecommerce sales have skyrocketed—reaching $861.12 billion in the U.S. last year. The combination of expanding laws and increasing remote sales is creating an incredibly complex and costly tax burden for businesses.

On average, small businesses spend more than $14,800 per month manually managing sales tax compliance in the U.S. That cost comes from states having varying definitions for what constitutes an obligation to collect, how much tax is owed, and different technological requirements. It’s unrealistic to expect or even hope for uniformity in tax rates or product taxability. With no uniformity, nor expectation of ever having it, a business must learn the rules before it decides to sell into a new state. There is no other choice for businesses if they intend their transactions to be compliant.

As a result of the lack of uniformity, many businesses have turned to technology to automate the management of tax. Taking the lead from businesses, states could significantly reduce the cost and burden of tax compliance for both sides if they also adopted technology to automate tax management.

The state-created Streamlined Sales and Use Tax Agreement (SST) was designed to simplify and modernize sales and use tax administration and substantially reduce the burden of tax compliance. Included in that initiative was the first-time states formally partnered with technology companies (certified service providers, or CSPs) to provide sales and use tax compliance at no cost to businesses. SST has reduced the burden of tax compliance with uniformity and technology in 24 sales tax states, but the lack of uniformity across all the states combined with increasing remote sales means the burden still exists.

If the lack of uniformity across the states creates complexity, it begs the question: could a national sales tax or national sales tax rules be a solution? The federal and state tax structures diverged from each other decades ago. States rely on the IRS and federal law to administer their income taxes, but they can be independent of the federal tax when it comes to sales tax. Imposing uniformity at the federal level would require either layering a federal sales tax on top of existing state taxes or having Congress inject itself into state tax policy. Either would likely increase complexity and neither is likely to happen.

If uniformity isn’t likely, then it is incumbent on states and the private sector to use technology. The Wayfair decision coincided with the rapid expansion of omnichannel retailing. This combination exposed every business to every state and local tax difference, which has made it complicated and expensive for businesses to manage tax on their own. As a result, businesses are rapidly investing in new software to automate.

This rapid investment in software aligns with a current trend in the U.S. to outsource everything that isn’t central and core to the business. Notwithstanding its importance to society, tax compliance is not central to nor a core component of a business—making it prime for businesses to outsource to a third-party compliance provider.

Over the past four years, remote sales tax states have onboarded thousands of new taxpayers, many of whom had outsourced their sales tax compliance. As such, the onus is on state and local government to appreciate the vast differences that exist between individual businesses and how they each handle their tax compliance, then focus on creating processes that accommodate those differences.

Unfortunately, government today approaches tax administration with the assumption that tax should be managed by individual businesses. Instead, it would benefit both sides if tax administration viewed tax compliance as a function that doesn’t require individual businesses to manage at all. This is where technology investment comes in. By leveraging the same technology already being used by businesses to manage tax compliance, states should see cost reductions and worry less about rate and rule uniformity that comes with political ramifications.

Looking forward, companies will outsource a greater portion of all their tax compliance. States should embrace this change as an opportunity to manage compliance in a way that increases their efficiency and reduces the cost incurred by businesses being tax compliant.

Scott Peterson currently serves as the vice president of U.S. tax policy at Avalara. Peterson was the first executive director of the Streamlined Sales Tax Governing Board. For seven years, he acted as the COO of an organization devoted to making sales tax simpler and more uniform for the benefit of business. Peterson also spent 10 years as director of the South Dakota Sales Tax Division and 12 years providing research and legal writing for the South Dakota Legislature. He’s now Avalara’s go-to resource for all things related to tax policy.