Whether or not you’re an online retailer, you’ve probably heard the Supreme Court recently ruled states now have the right to collect sales tax from online retailers.
South Dakota v. Wayfair, Inc. will likely have ripple effects in the months ahead as retailers, legislators, and service providers such as Lightburn quickly adapt to the changing face of ecommerce.
It’s not hyperbolic to say this ruling has the potential to dramatically affect the future of ecommerce. We’ve been fielding questions from many of our ecommerce clients and wanted to share our thoughts on this ruling and what it can mean for you going forward.
Previously, states could only collect sales tax on retailers who had a physical presence in said state. That’s no longer the case. This ruling means online retailers will now be required to collect sales tax from customers in individual states, not just the states in which they have a physical presence.
Does this just even the playing field?
Not exactly. Larger retailers such as Target or Amazon will be mostly unaffected because they likely have a physical presence in most states and are already paying these taxes. That means small and mid-sized online retailers have one less thing differentiating them from the big guys, so we’ll need to get smarter and more aggressive about finding other sales tactics to set our ecommerce clients apart from the crowd.
So now I have to collect sales tax in all 50 states?
It’s not quite that simple. So far, 26 states have a law on the books like SD does. The new law means states can now choose to collect tax on mailorder and internet sales. While it’s likely all 50 states catch up to ruling, they haven’t all yet.
In addition, the Supreme Court ruling was technically just about SD, which only requires online retailers to pay sales tax if it has 200 or more taxable transactions in a calendar year gross income of at least $100,000 in the state. Many small retailers may fall under those thresholds in multiple states. That’s why it’s critical to monitor your online sales very carefully.
How can I comply effectively?
In the good old days (ie.two months ago), we advised our ecommerce clients to collect taxes in only the state in which they had a physical presence. Those days are no more.
The good news is, there are a lot of tools available for quickly and easily calculating the correct sales tax to chart per state. Shopify has default tax rates that are easy to turn on and off by state, and they’re updated regularly. Avalara is robust we’ve been recommending to more and more of our clients.
Who benefits from these changes?
In short, not you.
States benefit because they can finally collect taxes on the growing business being done via ecommerce. Brick-and-mortar retailers benefit because now, suddenly, one of the major differentiators for online retailers is gone.
Unfortunately, if you’re an online retailer, you have some work ahead. You need to start looking very closely at your system to ensure you’re collecting and paying taxes in the states where you should be. In addition, you have to step back and think about how you’re calculating price points and shipping, what your profit is, and perhaps even where you want to be advertising around the country.
In short, South Dakota vs Wayfair Inc. complicates things for ecommerce retailers, and as a partner, we’re eager to help you sort it all out. The next few months will likely bring a lot more questions, new legislation, and follow-up lawsuits and we're here to keep you informed throughout the process.