Supreme Court Tax Ruling: States Can Force Online Retailers to Collect Sales Tax
Online retailers have long had a distinct advantage over brick-and-mortar shops: they don’t charge state sales tax. A new Supreme Court tax ruling, that passed late-June this year however, means that is about to change. By reversing a 1992 judgment that prohibited states from mandating online retailers to impose sales tax unless they had a physical presence in the state, the court has essentially opened the door to nationwide taxation on online purchases. This could mean total additional tax revenue of $13 billion annually for all states combined.
Who Is Affected?
The ruling, South Dakota v. Wayfair, Inc., came as the result of a South Dakota law proposed in 2016. That law would require online retailers with annual revenues of more than $100,000 or 200 transactions in the state to charge South Dakota sales tax on consumer purchases. Online retailer Wayfair sued the state in objection to the law. By overturning its 1992 decision in Quill Corporation v. North Dakota, the court opened the door to wider taxation. The majority in part justified its ruling by reasoning that the tax-free status quo gave online stores an unfair advantage over brick-and-mortar shops.
So, Where Does that Leave Taxpayers?
States with state tax laws can immediately begin requiring remote sellers to register and collect tax on purchases to in-state customers.
States with no laws on their books will probably take immediate legislative and regulatory action adopting nexus standards aimed at remote retailers. (Most legislative sessions are over for 2018, thus it can be assumed these states will not legislate change until 2019).
Is This Bad News for Online Retailers?
Since the ruling is mere weeks old, observers can only speculate on its effects. Opinion is split as to whether it is good or neutral for small businesses. A commentator on Bloomberg notes that price is no longer the competitive advantage for online retailers, whose business is driven more by selection and efficient supply chains. In other words, customers won’t abandon online sites because of a state sales tax.
A Maryland senator took a different take, writing that the “back office” burden is potentially huge for online retailers. Startups and small revenue companies may now be forced to collect and remit sales taxes for multiple jurisdictions, a massive administrative task with significant penalties for non-compliance. That senator notes the process is significantly easier for large online retailers like Amazon, who already have the financial resources to revamp their administrative systems, than for emerging or small revenue companies.
What Happens Next?
Currently, 45 states collect sales tax and many of them could benefit significantly from the additional revenue from online purchases. It is yet to be seen when and how states will actively move to force taxation on online companies, but markets seem to suggest they expect that to come in short order. After the ruling was released, shares in Overstock were down 7.2 percent and in Wayfair down 1.6 percent. Both companies claimed, however, that their businesses would not be adversely affected by the Supreme Court decision.
So What Should Clients Do Next?
Remote Sellers: Since only 45 states collect sales tax, know which states do and at what percentage. Then, evaluate your existing internal systems and set a plan to update it accordingly to the new law.
Marketplace Sellers: Assess the impact of state efforts to target small sellers. Determine the interplay between state laws requiring marketplace providers to collect tax and small seller exemptions and create a new process accordingly.