You’ve seen it in the failure of laws and companies to protect personal information. And now, we’ve seen it in how taxes are applied to eCommerce companies.
In a 5-4 decision earlier this year, the Supreme Court of the United States ruled that eCommerce companies can be held accountable for collecting sales taxes in states they ship products to. Previously, companies were only responsible if they also had a physical in that state (and some other situations). Thanks to the ruling in South Dakota v. Wayfair inc., large and small eCommerce companies around the country are wondering what exactly their eCommerce sales tax responsibilities will be.
Context To A Defining eCommerce on Trial
That this case found its way to the United States Supreme Court was no accident. In fact, several states have been trying for years to overturn a previous ruling limiting their ability to collect sales taxes from out-of-state eCommerce retailers. That case, Quill Corp. v. North Dakota, was passed in 1992, two years before the launch of Amazon (1994) and three years before the launch of ebay (1995).
While I’m sure you’re familiar with the growth of ecommerce in the last two decades, here are some numbers to consider. In 2016 total eCommerce sales in the US were estimated at nearly $395 billion, or just over 8% of total retail sales. Just 15 years earlier total eCommerce sales in the US were estimated at nearly $33 billion, or just 1% of total retail sales at the time. eCommerce blew up, and it blew up fast.
Because South Dakota has no income tax it was in a particularly good position to demonstrate how, as they argued in their petition to the court, the “States’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike.” Last year the state faced a $33.7 million budget shortfall, and estimated it missed out on up to $50 million in tax revenue due to eCommerce sales. Now they’re hoping to get some of that back.
Immediate Ecommerce Reactions
As might be expected, the immediate response by both eCommerce retailers and the stock market was panic. Nearly every major eCommerce retailer including Amazon, Wayfair and even Etsy, saw a massive drop in the price of shares. Since then, most people have seemed to calm down a bit, with stocks returning to normal levels and smaller retailers appeased with a further explanation of what the future holds.
Odds are that this ruling was far from a surprise for the legal or accounting departments of the larger eCommerce retailers. Amazon for one, with such a focus on efficiency, already has a physical presence in the form of warehouses in many state, and was already paying sales taxes in most cases. What will change is the need for third party sellers to begin charging sales tax on sales to the applicable states (everywhere but Alaska, Delaware, Montana, New Hampshire and Oregon).
Smaller businesses also need not overreact. State politicians are weary of hurting small businesses, and are therefore unlikely to pass legislation that limits their growth. The real target here are the largest retailers, like Amazon, who accounts for about 48% of eCommerce sales.
The law passed in South Dakota, for example, applies only to out-of-state eCommerce retailers that make more than $100,000 in sales, or more than 200 total sales to the state. These limits not only allow for the continued growth of small eCommerce retail businesses, but also make it easier for South Dakota to collect the taxes. As we’ve seen with other eCommerce regulations, it’s likely other states will follow suit.
How to Plan if You’re an Ecommerce Retailer
As Avalara Vice President of Government Affairs and U.S. Tax Policy, Scott Peterson, suggests, the first step is to take a deep breath. This Supreme Court ruling doesn’t mean changes will happen immediately, but you will want to be prepared. Part of that depends on where you live.
You’ll want to check your past shipping records against a list of states that have already passed laws similar to the one in South Dakota. Several states have already done so, so don’t be surprised if you’re already shipping to them. Again, the sales tax collection may not apply if you haven’t surpassed the threshold.
You’ll also want to check in with your accountant. Let them know you’re concerned and see what their suggestions are. They’ll know the best way to move forward from here, and may even have some ideas to offset any taxes you do end up paying. It’s always best to be prepared, then to be stuck at the end of the year.
Regardless of this ruling, the future is still very bright for eCommerce. With more and more people starting business everyday, we never ceased to be inspired by the amazing products and services being offered. It’s just a small part of why we do what we do.