A recent Seinfeld binge on Netflix got me thinking about local taxes. There’s a subplot in the show’s eighth season where Elaine wants to order the best Chinese food in the neighborhood but can’t get it delivered because she lives across the street from the restaurant’s delivery zone. As a workaround, she sets up camp in a janitor’s closet in the building across the street and tries to get the food delivered there. In typical Seinfeld fashion, chaos ensues.
Elaine’s experience, and the reluctance of the restaurant to deliver beyond their city block boundary line, is a strangely apt analogy for the proliferation of local taxes that have made accurate indirect tax determination a challenge today. Admittedly, this is not a connection that everyone would make, but when you spend your days helping corporations navigate the idiosyncrasies of tax compliance, you tend to see the tax angle in everything.
Throughout the U.S., all manner of small and mid-sized businesses, gig economy delivery services and digital streaming services are wrestling with a labyrinthine of hyperlocal taxes that can change significantly based on which side of the street a customer lives.
In the past, a business with a physical presence in a state that delivered goods and services to their customers was required to manage the complexity of state and local tax calculation. In today’s environment, many more businesses are responsible for tax administration changes, which have ratcheted up the complexity level for businesses selling goods and services to U.S. consumers.
The root of the issue of the change is the 2018 Supreme Court decision in South Dakota v. Wayfair, which ruled that states can mandate businesses without a physical presence in that state to collect and remit sales taxes on transactions in that state. This was a significant milestone. It meant that e-commerce companies, like Wayfair, based in Massachusetts, are obligated to collect and remit sales taxes for all sales made in places like South Dakota, where it didn’t have a physical presence, but completed more than 200 transactions or earned more than $100,000 in sales per calendar year. Additionally, it meant that states could enact their own laws based on this precedent, which, over time, created a complex assortment of local sales tax changes throughout the country.
Prior to the Wayfair decision, it was perfectly feasible, and relatively common, for a decent sized e-commerce company to be selling in all 50 states but only collecting and remitting taxes in the state where it was based. After the decision, almost every state in the country adopted some form of tax on remote sellers.
Meanwhile, state tax authorities also created new indirect taxes on digital and streaming services, such as Chicago’s famous “Netflix tax,” and all manner of taxes aimed at the gig economy. They’ve also been building a growing list of specific jurisdictional taxes used to fund public services such as safety, recreation and transportation.
Put all of that together and you get an environment in which businesses selling goods and services to different parts of the country must be able to pinpoint their customers’ location with laser precision to ensure they are collecting and remitting the correct amount based on their customers’ delivery address for sales of goods and billing address when delivering selected services.
For example, an e-commerce retailer selling goods to a customer located outside the city limits in Pierce County, Washington, in Q4 of 2021 needed to collect a tax rate that varies between 8% and 10% depending on whether the customer’s delivery address falls into the Regional Transit Authority boundary, Pierce County Public Transportation Benefit Area or the Hospital Benefit Zone. According to data from my company, Thomson Reuters, nationwide, there are between 400 and 500 of these types of special districts remote sellers must contend with in their tax determination processes.
The variation in tax rates from one side of the street to the other is a detail remote sellers need to incorporate into their tax determination processes in order to stay in compliance with the constantly changing local tax code. That kind of customized approach to tax collection has been commonplace in big businesses for many years, but it was not until recently that smaller businesses had the ability to reach broader customer bases via the internet. Widespread exposure, coupled with more state-level enforcement of sales tax compliance on small businesses, means business owners should get serious about the details of local tax law to avoid audits, penalties and fines.
The widespread availability of indirect tax software for smaller businesses has made it possible to automate large swaths of the local tax compliance process, but not all tax software was created equal. (Disclosure: My company provides tax software.) With solutions ranging from basic sales order and billing systems that include built-in tax processing tools to more elaborate, cloud-based tax management platforms solutions come in many shapes and sizes that will not always be right for every type of business.
When looking for a vendor, choose a partner with experience in your industry. Many industries are subject to complex regulations, so it is important that a vendor has extensive knowledge of the tax issues involved. Second, evaluate how the technology will integrate with any existing software you use to run your business. Tax technology can live and die based on its ability to integrate with other enterprise business systems, so it pays to make sure any new solution will work with your existing set-up. Finally, assess the flexibility of a tax software solution. As we’ve seen with the proliferation of new taxes in local jurisdictions over the past few years, keeping pace requires technology that can adjust to code changes on the fly.
Today’s delivery services, neighborhood restaurants and e-commerce retailers are not in the business of turning down potential customers who live on the other side of the street. Their business models depend on unlimited access, and—increasingly—their ability to deliver on that promise rests on an ability to navigate a complex landscape.