On June 21, 2018, the Supreme Court ruled that states have the authority to require businesses to collect online sales tax on purchases even if the business does not have a physical presence in the state. Previously, businesses were only required to collect sales tax in states where they operate physically. Though some major online retailers like Amazon were already collecting sales tax nationwide, the decision has implications for small- to mid-sized businesses who must adapt to remain compliant.
Mike Trabold director of compliance risk for Paychex, Inc. says that It’s not all bad news for business owners. While small businesses with an e-commerce presence may now be looking at a significant incremental compliance obligation, smaller brick-and-mortar operations who have always been required to collect sales tax are hailing the decision as providing long-overdue competitive equity.
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eCommerce expert, John Lawson had this to say about the ruling:
The way this case was positioned, it was hard for the Supreme Court to rule anything else. SOUTH DAKOTA v. WAYFAIR, INC., is not representative of all the small and medium businesses that this ruling will effect. The home goods e-retailer generated 4.72 billion U.S. dollars in revenues in 2017, up from 3.38 billion U.S. dollars in the preceding year. That is one huge jump from the mom and pop e-tailer making $100,000 in annual sales.
The real issue is that for a multi-billion company to ramp up the collection of taxes and fillings vs. smaller entities leave a big disadvantage and liability to the smaller retailer. There are now 9,998 different sales tax jurisdictions in the United States…that is a heavy burden and it needs to be rectified for smaller entities.
Mike Trabold feels that there are also some upsides for online retailers. He says:
- You have some time. It takes time for states to react to such rulings and make the necessary changes to enable the collection of a new tax. While some states have been readying their processes in anticipation of the ruling, most will have work to do before enacting any major changes. In the meantime, it’s wise to get in front of this by locating the tools you need going forward.
- Some states already have, or will likely enact, thresholds above which the tax will be triggered. Thus, if your activity in a particular locale is below an ordained dollar or transaction level, you may be exempt.
- The Streamlined Sales Tax Agreement. Twenty-four states currently participate in this agreement, which in addition to standardizing some of the supporting tax calculation and submission protocols also provides for free sales tax compliance software for retailers under certain circumstances.
Though the Supreme Court’s decision has been made, there are areas that small online retailers will still need to keep an eye on:
- Some states may be tempted to look to collect these taxes not only going forward, but retroactively.
- Federal standardization. Policy makers grasp how challenging it will be to stay on top of the multitude of state and local sales tax rules. As such, the Supreme Court ruling may prompt Congress to finally enact a standardized federal policy – though this may be politically unlikely for now.
- Potential impact on general business taxes. Some states don’t levy income taxes on businesses without a brick-and-mortar location within their borders. This decision may spur these states to reconsider that stance given the opportunity for incremental revenue.
Though some effects of this ruling are unknown at this time, business owners can take steps to prepare. First, you should assess impact, evaluating where your main out-of-state sales come from. This will give you a sense of where you may want to focus your compliance attention. Next, find tools and resources to help ease the transition. Look for an established software solutions provider that provides a comprehensive, easy to use, reasonably priced product and which has the resources needed to stay abreast of the wide, complex, fluid array of state and local sales tax requirements. Your CPA will also be able to provide guidance aligned with your specific situation.