The digital age has changed the way we do business. Not only has the internet posed a challenge for traditional businesses, the digital platform has the potential to dominate the entire retail industry.
With eCommerce rapidly growing, the Supreme Court recently reversed a two-decade-old decision on internet sales tax. Here’s what you need to know about the change, so far.
In 1967, a Supreme Court concluded that Bella Hess, a store located in Kansas, did not have to charge its customers in Illinois the state sales tax. In 1992, the Quill Corporation v. North Dakota case further ruled that online retailers were protected from state sales tax if they did not have a storefront or warehouse present in the state. Recently, the South Dakota v. Wayfair case revisited these rulings and demanded a change. Now, states can require online retailers to collect sales tax despite their physical presence.
If you own a small business, this may affect you.
Currently, legislation for most states determines that you will not be required to collect and remit sales tax unless you have physical presence (nexus). This new ruling may change that.
If you only sell at a storefront, your business may become more competitive to your online counterparts. If you are an eCommerce business, you may need to prepare to make some operational changes, especially if you sell nationwide. You will need to know the different tax obligations for each state you do business with, which could be a daunting task.
It’s also important to note that this ruling may affect you differently depending on what your business offers. For example, if you deliver services, the regulations for your business may differ from a business that sells tangible goods. Again, with the supreme court decision being so recent, there are a lot of possibilities and it’s difficult to know how each state will react.
Here is a map created by the Tax Foundation that outlines the different state tax obligations (note: this was made prior to South Dakota vs. Wayfair decision):
There are talks about exempting small businesses.
Many companies, including Etsy, Overstock and eBay, are hoping that Congress will step in and provide an exemption for smaller businesses in order to for them to fairly compete. Currently, South Dakota’s state tax law carves out an exemption for small businesses, allowing those with fewer than 200 customers or sales below $100,000 to not collect sales tax.
Large internet retailers don’t love it.
This new ruling is arguably aimed at larger businesses. However, many large online businesses already abide by all the state sales tax laws. Still, some of them also support third-party retailers who don’t. eCommerce sites such as Amazon, eBay and Wayfair will have to do more to support their sellers. Amazon already offers a tax calculation service to help their marketplace sellers stay compliant. Using a tax software or building an in-house tax system may be the next steps for businesses trying to navigate the new change.
It increases state revenues exponentially.
Reports have forecasted up to a $23B increase in state revenues garnered from internet sales tax.
It could level the playing field.
Some have argued that the previous ruling was outdated and did not fit the economic position of eCommerce companies today. At the time the Quill Corp. vs. North Dakota was enacted, online sellers were less common and struggled to compete with established brick and mortar businesses. Over the years, the law started putting traditional businesses at a competitive disadvantage to the booming online businesses. The new ruling aims to change that.
Keep in mind, the internet sales tax is new and some states are still deciding how they want to approach taxing online businesses. Until Congress or states adopt legislation, it’s business as usual. There should be no immediate impact on your operations. As the ruling begins to take shape in each state, it is important to stay up to date on the rules and regulations so you can stay compliant and ensure the success of your business!