The world of ecommerce business will be changing after today’s US Supreme Court ruling in South Dakota v. Wayfair, Inc et al, clearing the way for states to collect sales tax from ecommerce companies, regardless of the companies’ physical presence. Before creating a strategy to comply with the new ruling, you need to understand it, and thus we’re summarizing the major points for you here.
The ruling is being considered a victory for states, which estimate they’ve missed out on billions in tax dollars, as well as brick and mortar retailers that claim they’ve been losing business to ecommerce. Ecommerce retailers are now looking to understand what implications the ruling has for them.
Previously, states could only charge sales tax if the online company had a physical presence (brick and mortar store, warehouse, offices, etc.) in the state. If I purchased from AcmeOnline company, and they had their offices in MA, then I would pay tax because I live in MA. But if they had offices in CA or RI, then I would not be subject to those states’ taxes. Ecommerce companies will now need to charge sales tax to customers in 45 states (Alaska, Delaware, Montana, New Hampshire, and Oregon don’t have sales tax).
The Court decision was a narrow 5-4 ruling with Justice Anthony Kennedy writing the majority decision overturning the physical presence rules that had been upheld in the 1992 Quill Corp v. North Dakota, and 1968 National Bellas Hess Inc. v. Department of Revenue of Ill. Justice Kennedy called those rulings “unsound and incorrect,” noting “the Internet’s prevalence and power have changed the dynamics of the national economy.” The dissent focused on the issue of state taxes belonging under the jurisdiction of the legislative branch of government rather than the judicial. In his dissent, Chief Justice John Roberts stated “E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”
Concern for ecommerce retailers
Although the court case was focused on large ecommerce companies Wayfair, Newegg, and Overstock, it’s the smaller ecommerce businesses that could take the brunt of the impact. Online retailers will need to decide if they wish to maintain a competitive price edge by lowering item cost to cover customers’ tax outlay, or risk simply adding taxes to their customers’ carts and possibly losing business. Companies of all sizes will need to update their tax processing, compliance, and accounting practices – a considerable task for small companies running at resource capacity.
No matter what other choices they make, companies will need to understand a cluster of tax laws that vary state by state. In the Court’s dissenting opinion, Chief Justice Roberts wrote: “Texas taxes sales of plain deodorant at 6.25 percent but imposes no tax on deodorant with antiperspirant. Illinois categorizes Twix and Snickers bars — chocolate-and-caramel confections usually displayed side-by-side in the candy aisle — as food and candy, respectively (Twix have flour; Snickers don’t), and taxes them differently.”
Reaction to the ruling
The ruling has received split responses as illustrated by tweets from the Governor of South Dakota, the National Retail Federation and NetChoice trade associations, and eBay. The latter noted that the Court had made a distinction between big internet retailers and smaller retailers, but what impact this distinction will have for smaller businesses is unclear.
We’ve seen the stock for Wayfair, Amazon, Etsy, and others fall and then make some recovery today. However, it’s the smaller online retailers doing business across many states that could feel their revenue impacted in the coming years as more states fall in line to collect taxes. Maybe we’re biased, but one thing seems certain: more than ever, ecommerce companies of all sizes will need to rely on cost-effective marketing practices to drive growth.
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