Today’s evolving regulations and ever-changing sales tax rates are complicating the once-familiar territory of sales tax collection and remittance for businesses selling across state lines.
To keep compliant, business owners and accounting professionals are finding it more important than ever to stay abreast of legislation and other measures related to remote sales and use tax.
The Streamlined Sales and Use Tax Agreement (SSUTA) is one such measure. Although it has an enormous impact on ecommerce businesses, many businesses are still unclear about what the SSUTA is.
What is SST?
Streamlined Sales Tax (SST) grew out of a combination of three factors: state efforts to tax remote sales; two separate United States Supreme Court rulings (National Bellas Hess v. Illinois in 1967 and Quill Corp. v. North Dakota in 1992) that opined state and local sales tax compliance was too complicated to inflict on out-of-state businesses; and the emergence of ecommerce.
In an effort to simplify sales tax collection and create a more business-friendly sales tax system, state and local officials from 44 states partnered with the business community in 2000 to create the Streamlined Sales Tax Governing Board. This governing board has since been working to make sales tax administration in participating SST states less costly and burdensome for all businesses and all types of commerce.
Exactly how does SST simplify sales tax compliance for businesses?
To facilitate the collection of remote sales tax for businesses, SST member states are required to provide the following:
- Consumer privacy protection
- Simplified administration of exemptions
- Simplified state and local tax rates
- Simplified tax remittances and returns
- State administration of sales and use tax collections (no self-collecting local jurisdictions)
- Uniform state and local tax bases
- Uniform sourcing rules for all taxable transactions
- Uniform tax base definitions and rules
Furthermore, all SST states allow businesses to register through the Streamlined Sales Tax Registration System (SSTRS). This central, electronic system enables businesses to register to collect and remit sales tax in all SST states at once, or in individual SST states on an as-needed basis.
Once registered, a business can manage most aspects of sales and use tax compliance itself, or further simplify tax compliance by outsourcing the bulk of sales and use tax administration to a Certified Service Provider (CSP) like Avalara. In addition to handling sales and use tax registration, Avalara provides real-time sales and use calculation, files returns, remits payments, and more. There are five SST CSPs, including Avalara.
While using a CSP tends to be the most effective way to manage sales tax compliance in SST states, SST also benefits businesses opting to self-manage sales and use tax administration as well. For example, businesses can quickly update information (e.g., change an address) or terminate registration (e.g., close a business) in all states where they’re registered through the SSTRS.
Other benefits of SST
The simplification measures listed above help reduce the headaches of sales tax administration for businesses, but there’s another important benefit worth noting. Any business that qualifies as a “volunteer seller” in SST states may obtain sales tax calculation and reporting services from a CSP, such as Avalara, at no cost.
SST member states will compensate a CSP for providing the software and services required to set up and integrate its Certified Automated System (CAS) with the volunteer sellers’ business systems, responding to sales and use tax notices, and audits on behalf of a volunteer seller, and more. This can amount to substantial savings for many businesses.
To qualify as a volunteer seller in an SST state, a business must meet the following criteria during the immediately preceding 12-month period:
- No fixed place of business for more than 30 days in the state
- Less than $50,000 of property in the member state
- Less than $50,000 of payroll in the state
- Less than 25 percent of total property or payroll in the state
- Additional criteria
As of October 1, 2019, there are 23 member states that fully comply with the provisions of the SSUTA: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming. Tennessee is an associate member state.
Other states may be working toward full membership, but it’s a complicated, lengthy process.
If you sell through an online marketplace, such as Amazon, Etsy, or Walmart, it’s also worth noting that 43 states comply with marketplace facilitator laws specifically, which is different than SST. Click here for a state-by-state guide to marketplace facilitator laws.
South Dakota v. Wayfair, Inc. and SST
Not too long ago, physical presence (physical nexus) in a state determined whether a business had an obligation to collect sales tax within that state: Businesses with no physical presence in a state couldn’t be compelled to collect sales tax.
In June 2018, however, the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc., a case that challenged the long-standing physical presence rule preventing states from imposing a sales tax collection obligation on out-of-state sellers.
The Wayfair decision overruled the physical presence rule. In the opinion, the Court highlighted the following three aspects of South Dakota’s sales tax system that appeared designed to prevent undue burdens on interstate commerce.
- South Dakota provides safe harbor, or exception, for small sellers
- South Dakota can’t retroactively enforce its economic nexus law
- South Dakota is a member of the SST, meaning it took steps to simplify and modernize sales and use tax administration to reduce the burden of sales tax compliance, especially for remote sellers
Thanks to the Wayfair ruling, economic activity alone (economic nexus) can now trigger a sales tax collection obligation: Physical presence in a state is no longer the sole requisite for sales tax collection. Economic nexus laws typically base a sales tax collection obligation on a remote seller’s sales revenue or transaction volume in the state, or a combination of both.
As of this writing, all but two states with a general sales tax have adopted economic nexus. To avoid creating undue burdens upon interstate commerce, most states have been looking to the Wayfair ruling and SST to guide them.
For example, most states with economic nexus allow an exception for small sellers (a notable exception is Kansas, which may come under fire for failing to do so); most states are enforcing economic nexus on a prospective basis only; and most give businesses a decent heads-up. Nonetheless, complexity abounds.
One of the most challenging aspects of economic nexus laws is that the thresholds for small-seller exceptions vary from state to state. In each state, they’re based on different sales revenue or transactions, as well as differing taxable sales.
For example, Pennsylvania and Texas include exempt sales and services in their thresholds; North Dakota and Virginia do not. Some states include digital property, some services, and some only taxable tangible personal property.
It takes considerable effort to determine whether a business has economic nexus in a state in the first place. Once that’s confirmed, the business needs to register with the tax department then commence collecting and remitting sales/use tax and filing returns according to state (and sometimes local) law.
This can have an enormous impact on companies hitting economic nexus thresholds in multiple states. For ecommerce businesses in SST states, registering through SST can help lessen the impact.