In case you missed it, on June 21 the Supreme Court of the United States passed a judgment that states were now allowed to impose taxes on online sales. This overrules its previous decision to rule out tax collection on stores that did not have a physical presence in that state.
So what does this law means and how is this going to look for your online business?
Before we go further into the South Dakota vs. Wayfair Inc. ruling, it is important to be familiar with how sales tax on online purchases used to work until now. The previous verdict from 1992, also known as Quill Corp. vs. North Dakota ruling, set forth that online retail merchants only had to impose taxes on their online sales in states where they had a physical presence or a “nexus.” This means that the customers were required to pay the tax on the purchase to their home state directly.
The problem with this, however, was that online merchants were barely accountable (if at all) for sales taxes. On the other hand, the customers were responsible for working out all of their taxes. As might be expected, the taxes were scarcely ever paid. In fact, the states reported lost sales tax revenue of up to $33 billion every year.
How do these new tax laws change things?
Subject to the Quill Corp. vs. North Dakota ruling, if a customer lives in a state which imposes a sales tax, that customer would have to choose between shopping at a brick-and-mortar store and paying the levy or shopping online from an e-commerce site – with no nexus in that state – without any additional charges. Clearly, e-commerce sites held an unjust price advantage. With this ruling, however, the playing field has been made even for both the brick-and-mortar and online stores.
What the South Dakota vs. Wayfair, Inc. ruling also does is make taxes way more complicated for online merchants, what with having to tally up taxes for customers from up to 10,000 different sales tax jurisdictions! This might be viable for giant corporate bodies; on the other hand, smaller merchants could very well find this to be a logistical nightmare.
Will this ruling impact your online business?
First of all, given that the law will vary in every state, it is a bit hard to know for sure how the new rules will impact online businesses until each state concludes how they are going to move forward with these laws. Whichever way they come down in favor of, though, the new laws are going to lead every online business – both large and small – to a sales tax nightmare.
Keep in mind that a business still gets to decide who pays the taxes – the business or your customers. Though, either way, the new laws do indicate that you will not have the same cost competitive advantage as you had earlier; you have to be mindful of the fact that cost is not everything when it comes to online shopping. As a matter of fact, people never preferred online shopping for the cost-effectiveness in the first place. They were, instead, choosing online shopping for the convenience and the shopping experience e-commerce sites offered.
Certainly, this is a problem that will not go away soon. Every online business is going to be in the same tax boat, so it is not like your online business will be struggling for a market share. So financially, your online business will be good enough. Logistically, however? Not so much. So you should really be concerned about responsibility for all those inconsistent taxes because being accountable for sales taxes can be a huge burden for any small e-commerce business.