This week marked a huge milestone in the development of ecommerce.
In case you haven’t been following along, as online sales has steadily grown to become 10% of the total sales in the US, there has been increasing concern from state governments about their loss of sales tax revenue as well as growing confusion and fear from online sellers about their responsibilities regarding collection and remittance of sales tax.
Everyone in the ecommerce industry knew that, at some point, there would have to be a tipping point. That point was reached earlier this week when the US Supreme Court made their decision on the South Dakota vs. Wayfair case.
Until Thursday, the rule of the land was based on the opinion from the 1992 court case, Quill Corp v. North Dakota. In short, it stated that in order to be subject to sales tax, the company had to have a significant business presence in the state. “Nexus” is what established that significant business presence which included factors such as the presence of business property (i.e., inventory), employees, sales people, and so on.
Nexus became a substantial challenge for third-party sellers who sold their products via Amazon FBA (Fulfilled by Amazon) when Amazon launched the program in September 2006. As part of their service, Amazon would route third-party sellers’ products from warehouse to warehouse (i.e., state to state), and as Amazon expanded the number of its warehouses, they were unintentionally creating nexus issues for all of their third-party sellers which increased their legal responsibilities to collect sales tax.
Some sellers defiantly assumed the risk of non-compliance; others began collecting and remitting sales tax in either a handful of the high risk states or even in all Amazon-occupied states as Amazon opened new warehouses.
Meanwhile, as online sales continued to cannibalize the brick-and-mortar sales, state governments’ sales tax revenue continued to tank. It was inevitable that one of the states would eventually get their case escalated to the US Supreme Court, and South Dakota was the lucky winner.
By overruling the Quill case, the US Supreme Court ruling throws the traditional definition of physical nexus completely out the window for state sales tax purposes. It no longer matters whether a company has ties to the state. States can tax them anyway.
If there are sales in that state, the state can create its own rules about who is subject to collecting and filing. Several states have already been dipping their toes into the concept of “economic nexus” by forcing companies to file based on dollars sold and/or number of sales in that state.
The ruling in South Dakota v. Wayfair just made economic nexus a-okay.
And to add insult to injury, if it’s not the company’s home state, the states doing the taxing don’t care much about the opinions of the companies being taxed when establishing the rules (you know, taxation without representation and all that).
For Those Who Say This Ruling Levels the Playing Field for the “Mom and Pop Shops”
There are 45 states (plus DC) that have state sales tax laws. Every state is going to want to increase their revenue by following the precedent set by the US Supreme Court, so they’re going to start acting to do that as soon as possible.
I think what many people don’t realize is that the online sellers of today ARE this millennium’s mom and pop shops. The vast majority of online sellers are small with razor thin margins. Many don’t have any employees at all and make very little profit. And yet, states are fighting to have them collect and remit sales tax to make it “fair” to the local brick and mortar businesses.
Imagine you and your spouse open up an online store and begin selling widgets for a tidy profit. Maybe you’re successful enough to be able to rely on profit of about $75,000 per year which is more than the average household income. Yeah!
Now you learn that you may need to collect and file sales tax in 45 states. There is no way you’re going to be able to learn about the different rules in each and every state AND collect sales tax properly on all your shopping carts AND prepare sales tax filings every month, quarter, and/or year (and keep track of which is which). It would become your full time job.
So let’s assume you can find a way to do it for only $50/mo per state. 45 x $50 = $2,250 per mo x 12 months = $27,000 per year. That mom and pop shop just slashed their profit from $75,000 to $48,000 per year.
It will be up to the US Congress to pass laws to protect these small businesses, but with a 17% overall approval rating… yeah, there is low confidence that that’s going to happen.
Good News / Bad News for Sellers
With all of the above said, the state leading the charge here (South Dakota) does not require sellers to collect sales tax until they make $100,000 in sales in South Dakota OR sell 200 transactions in South Dakota. The good news is that with such a low population in South Dakota, it’s actually pretty difficult to meet this threshold. In fact, an online retailer with an average order amount of $25 would need to have about $1.8 million in total company sales to meet that $100,000 threshold. And their state it not alone.
The bad news is that as a business owner, it’s now your responsibility to keep track of the ever-changing state sales tax laws in every single state to make sure you are adhering to all the rules.
What Does This Mean for Consumers?
The days of buying items on the internet because you “don’t have to pay sales tax” are pretty much over. It won’t happen overnight, but we’re definitely moving in that direction. I don’t personally think many people will be so upset about it that won’t buy online. Honestly, their alternative is to go to a brick and mortar store which will absolutely be charging sales tax. So I don’t see consumers as the ones being directly harmed in this way.
Plus, consumers’ communities will presumably be improved with the new revenue being taken into their states.
However, I do suspect that the online “mom and pop” stores that are now deciding that the cost of compliance is too great to stay in the business will lead to less competition in the marketplace and/or the costs of compliance will be passed along to the consumers in the form of increased prices. So this is the greater concern for consumers, in my opinion.
Where to Go from Here?
If you’re selling online, you might be a little lost about where to start with all of this. That’s okay - we’ve got you covered.
You can start by checking out our YouTube video on this topic for more information (and don’t forget to subscribe!).