The Ruling

The June 21st Supreme Court decision of SOUTH DAKOTA v. WAYFAIR reached a verdict in favor of South Dakota’s attempt to eliminate tax-free retail sales via the internet. Before last Thursday’s outcome, states only collected sales tax from online retailers if said retailer had a physical presence via storefront, factory, warehouse, or any location with employees within the state lines. The push for change began in South Dakota but can now affect all 50 states similarly. The ruling gives each individual state the capability to demand online sellers and vendors to collect sales tax on transactions that occur outside of the state the said seller is located in. In layman’s terms, a company centralized in North Carolina may now be required to collect sales tax on transactions that send their products to locations outside of the state’s borders.   The collection of this tax is solely dependent on the state to collect and pursue and each of the 50 states will approach this differently. The ruling gives the states flexibility and charge to increase tax revenue but it comes at a cost to consumers and online sellers.

The Effects

Consumer

Consumers are stuck in the middle between states and retailers in this equation. They are the crux of trade and because of this are usually rewarded and come out on top with increased buying pliability in issues of this sort. However, the supreme court’s ruling actually minimizes their buying power in whole.

For example, a deep sea diver in Florida may be interested in upgrading his equipment so he goes to his local scuba shop. There he spends an hour with a store employee surveying the different models and learning the most he can about which product(s) suit his needs best. He finds the perfect fit but wisely leaves the storefront, goes home, and purchases the equipment online for an equivalent price but without the additional 7% or so sales tax that would have been included had he bought the equipment in store.

In this situation, the consumer comes out on top while the brick and mortar retailer suffer due to loss of business. Situations like this are part of the reason why the Wayfair case came into action in order to level the playing field.

Online Retailer

Tax issues are rarely straightforward and this supreme court ruling has further muddied the waters of tax compliance for online retailers. Even for businesses that are headquartered and operate out of a single location albeit small mom and pop business or larger corporations, if they sell to more remote locations they may be required to understand many tax compliance policies for each location they sell to. This issue may become pressing for businesses with resource restrictions. Each state has a different tax code, some are more complex than others, but the pertinent issue is that they are all different.  Smaller online businesses will struggle to understand how each state’s code operates and how to implement and integrate the respective code into their eCommerce shops or business models.

Some good news for these online sellers is that not every state plans to pursue these new tax restrictions and the ones that do will take 12-18 months or more to implement. There are also tax compliance companies out there such as Vertex and Avalara that can help guide your business to understand the complex and changing world of tax. Their industry-leading automated solutions can eliminate many of the headaches that this ruling brings about to your online business. Their software can automatically identify tax compliance codes for each transaction based off of the customer’s shipping address. This can simplify the transition many businesses face in the coming months, but it certainly does not eliminate it.

Legal

As a high profile court case, this ruling naturally constitutes backlash in many forms. Appeals will occur and other solutions will be explored to ensure fairness across the board. States have the right of way to pursue a new stream of tax revenue. However, in cohorts with Congress, many online sellers are analyzing the vocabulary of the decision and formulating relevant responses. The decision admits a state to have “some definite link” or “some minimum connection” to the business it desires to tax.  State laws cannot discriminate against or impose “undue burdens on interstate commerce“. These lines are called to question due to the state government’s lack of contact with said online sellers.

Also looming is the question whether a state can pursue retailers for uncollected back taxes, though South Dakota and several other states have pledged not to.

The Rebuttal

With many questions in play, one of the most prominent strategies to answer these doubts lies with the Marketplace Fairness Act. This act was passed by the Senate in 2017 but has halted at the House. In accordance with the act, states agree to simplified rules that make compliance easier and discrimination tougher. The act simultaneously forbids states from imposing new tax collection obligations until after it is set in place, eradicating any retroactive tax liability. A final component that will help online sellers evade new tax collection policies is due to online sellers that earn less than $1 million USD in annual revenue would be exempt from collection laws. This level of revenue is a compromise with respect to the $100,000 proposed level set by Wayfair.

Many businesses and people alike wait on Congress to step in and take action.

In the meantime, if you are an online retailer begin your research now on a few things:

  • Gather data on product SKUs, transaction count, and revenue in each location you sell to remotely
  • Prioritize states where the company has the greatest  presence
  • Create a plan to collect and remit sales tax in said states
    • This can be done through your marketplace, or with a hosted, or cloud-based technology solution
    • Some popular solutions are:
      • Avalara
        • Avalara and their team of tax experts are putting on a live Q&A session to answer many of the questions your business may have
      • Vertex
        • Similarly, Vertex is hosting a comprehensive webinar to explain the impact of the ruling
          • You can register for the July 10 session here
      • Taxjar
  • Inform your team of the ruling
  • Strategize how to process this decision and evaluate the impact it will have on your finances
  • Brief your customers preemptively upon possible changes to your site

 

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