The United States Supreme Court ruling yesterday on South Dakota v Wayfair portends enormous changes for online merchants in terms of how they charge and collect sales tax for consumer purchases. As an agency whose purpose is to counsel ecommerce merchants, we have an understandably deep concern of how this may affects our clients.
First, the caveat: we are not lawyers nor accountants. Any final decisions you make as a merchant regarding changes in how you collect or pay taxes should involve consultation with your qualified legal and/or financial consultants.
We’re now going to give you our best responses to the 5 more pressing questions on this subject — as we understand the situation at this particular point in time.
Question 1: Does the ruling mean I have to start collecting sales tax on all sales to customers everywhere in the United States?
Not immediately. It does mean that if you sell to customers in South Dakota, you have to collect and pay sales taxes. At present, they’re the only state that has a law on the books requiring all vendors selling into the state to pay sales taxes. But, it’s not quite that easy, either. South Dakota has an “economic presence test,” which states that your sales tax obligation only exists if, as a merchant, you sell more than $100,000 of goods or complete 200 or more transactions during the year.
We’re unclear as to whether this means you’re liable for all transactions up to $100k/200, or only after. The key point here is that with this ruling, any state or jurisdiction can require sales taxes to be paid by out-of-state vendors. It will take time for the states to enact legislation and policies in light of this decision.
Question 2: Won’t it be enormously expensive for me to collect and pay taxes across the 10,000 or so taxing jurisdictions?
Not necessarily. There are a number of online services that already provide accurate sales tax computations for purchases, as well as reports filing and other related services. And at a fee much less expensive than hiring an accountant or having your staff manage all the report filing.
One company we really like working with is TaxJar (a strategic partner of novusweb). Plans start as low at $17/month. TaxJar, as with their competitors, integrates with most eCommerce platforms. We think TaxJar does it better than most, though.
The important feature here is the access to state filings. You can imagine that being late on filing sales taxes across multiple jurisdictions could rack up a ton of fines. TaxJar, or the like, can make sure you’re filing accurate reports on time.
Fortunately, despite the fact there are over 10,000 taxing jurisdictions, sales taxes are collected at the state level (don’t forget Washington DC, though). At most, you’ll end up with 51 filings (not including any US territories that can now join in).
As with anything else, this is a “cost of doing business.” It’s not fun, and it will require that you use another service, but it’s not as daunting as it could be thanks to some very clever technology services.
Question 3: Doesn’t Amazon already collect these sales taxes?
Yes, and no. Amazon famously decided to collect sales taxes for all online sales in all states. The taxes they collect, however, are only on sales of products sold directly by Amazon, not products sold on behalf of other merchants selling through Amazon. These merchants charge sales taxes according to their preferences.
Furthermore, Amazon (and Walmart, for that matter) are reported to pay only the state sale tax, not the sales tax at the county, municipal or other local jurisdiction level.
With this ruling, it’s likely everyone will be paying more online as sales taxes will be collected based on the shipping address of the purchase.
Question 4: Will this ruling hurt my online sales?
This ruling came about (and included Overstock and Newegg as defendants with Wayfair) as a means of “leveling” the playing field between online merchants and local, brick-and-mortar stores. At least that’s what seems to be a driver behind the ruling. Justice Kennedy, in the majority decision, stated that the “physical-presence” rule as defined in Quill v North Dakota (1992) “allows remote sellers to escape an obligation to remit a lawful state tax is unfair and unjust.”
In reality, the biggest motivation for this case was not unfair competition, but the perceived loss in revenue collections by the states. At present, that amounts to about $13 billion in potential sales tax revenues — not a huge amount in the national scheme, but a figure that is destined to rise over the years.
We’ve personally never objected to a “level” playing field. As merchants ourselves over the years, we love level playing fields because we can compete very well on other aspects such as content, marketing, and customer service. It’s easy to claim savings because you don’t have to collect sales tax (as Wayfair blatantly promoted on their website, as noted by the Court); it’s harder to do the things other competitors won’t do, but which, in the long run, make you more successful.
If you have the products your customers want at a fair, competitive price, we really doubt collecting sales tax will be a major deterrent. Or drive shoppers into local stores. The primary reasons people shop online is selection and convenience: two features actual stores can’t provide.
Question 5: How quickly should I take action?
The effects of the Supreme Court ruling takes effect today. Right now.
However, the only state of which we’re aware that currently demands sales taxes from out of state merchants is South Dakota. We don’t think running through the streets screaming panic is yet justified.
That said, we do NOT think you should wait to implement a service like TaxJar (Avalara is another viable alternative). These services have to stay on top of the legislation across all taxing authorities and will make sure you’re computing the proper tax amount and reporting it to the proper agencies.
Every state is going to follow suit here; it’s just a matter of time. Better to go ahead and get on top of this now.