BACKGROUND ON SOUTH DAKOTA V. WAYFAIR
In a 5–4 decision made by the US Supreme Court in the case of South Dakota v. Wayfair, a precedent has been overturned which protected online retailers with no in-state, brick-and-mortar presence from paying state sales taxes. Overturning 1992’s Quill Corporation v. North Dakota, the Supreme Court’s ruling will now allow states to collect sales tax from ecommerce retailers.
Prior to the June 2018 ruling, online retailers were typically required to collect sales tax from consumers in which the retailer had some type of “nexus,” or physical presence. Nexus is determined under individual state laws, which vary among the 45 states that charge sales tax.
In 2016, South Dakota officials targeted major online retailers by filing lawsuits against Wayfair, Overstock, and Newegg, which under the 1992 ruling were not required to collect and remit state sales tax. The cases made their way to the US Supreme Court where Wayfair was singled out by Justice Anthony Kennedy. A federal report cited by Justice Kennedy estimates that as much as $13 billion in sales tax revenue is lost annually to online retailers protected by the 26-year-old precedent. Other reports estimate that between $8 billion and $33 billion in tax revenue is lost annually.
In anticipation of the ruling, several states have already begun drafting new tax laws, which will affect online retailers. Many other unknowns are also left to be determined, including whether states will be able to collect sales taxes retroactively and whether individual sellers on websites like eBay and Etsy will be affected.
IMPLICATIONS FOR MAJOR ONLINE RETAILERS
There is no denying the impact the Quill Corporation v. North Dakota decision has had on the growth of ecommerce. In his majority opinion, Justice Kennedy acknowledged this growth by stating, “in 1992, mail-order sales in the United States totaled $180 billion. Last year, ecommerce retail sales alone were estimated at $453.5 billion.” This growth, which significantly contributed to the rise of major forces in ecommerce, has also led to a disparity between online-only and traditional retailers.
Supporters of the Supreme Court’s decision say that requiring large online sellers to collect sales tax will level the playing field for retailers with brick-and-mortar locations, including Walmart, Target, and Best Buy. Being required to collect sales tax means websites like Wayfair no longer have a competitive advantage, represented by a 5% to 10% price difference.
Amazon, on the other hand, will be largely unaffected by the new tax ruling. The ecommerce giant has already been voluntarily collecting state sales taxes on products that it sells directly, regardless of nexus. What remains unclear is whether third-party sellers operating on Amazon, which account for roughly half of total sales, will be responsible for charging sales tax. To date, third-party sellers on Amazon have not been required to collect state sales taxes.
IMPLICATIONS FOR SMALL ONLINE BUSINESSES
While proponents of the ruling argue that it will benefit retailers with a brick-and-mortar presence, small businesses that sell online will need to adjust to new state laws. With no uniform rule across the country, tracking sales by state and applying the proper tax rates may be difficult for small businesses.
Under the new South Dakota law, for instance, an online retailer is required to collect sales tax if it processes either $100,000 in sales or 200 separate transactions from state residents. This means that to comply, anyone selling goods online would need to estimate and track sales to consumers living within the 45 states that charge a sales tax. Businesses would also need to account for which types of goods are taxable in each state, and because tax law compliance may be difficult for small businesses to manage, a paid tax collection service could become an unavoidable expense.
Critics of the Supreme Court’s ruling also speculate that the decision will strengthen Amazon’s position in the ecommerce space at the expense of independent online sellers and small brick-and-mortar retailers with online stores that may not be as well equipped to manage state sales taxes.
WHAT THIS MEANS FOR MARKETERS AND ONLINE RETAILERS
Marketers with ecommerce objectives should immediately begin reviewing state tax laws to understand the requirements for collecting and remitting sales taxes by state. Changes to ad copy, marketing materials, and product pages may be necessary to reflect the inclusion of sales tax.
To help businesses understand and comply with individual state tax laws there are ecommerce shopping partners that manage tax compliance. These services don’t come cheap, however, and may not be right for all types of businesses. Amazon also offers sellers a paid tax collection service, which may be worth exploring.
Additionally, retailers now required to add sales tax to purchases should attempt to educate consumers on the increase in costs. A notification at checkout that fully explains why the price has increased can help to reduce the likelihood of shoppers looking elsewhere for lower prices.
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