If your business sells anything taxable you’re going to want to check this article out. Unless you’ve been hiding under a rock for the past week, a very recent court case was finalized on June 21, 2018, South Dakota v. Wayfair, in which the Supreme Court overturned past precedent from cases National Bellas Hess v. Illinois (1967) and Quill Corp. v. North Dakota (1992). Why should you care? These cases all dealt with the parameters that must be met for States to require businesses to impose the duty of sales tax collection; including the requirement of physical presence and a substantial connection to the state. These rules gave out-of-state sellers and online retailers an advantage and States a weakness. As a result, there were significant revenue losses to the States and thus Congress saw the requirement of presence as an incorrect interpretation of the Commerce Clause.
What Does This Mean for Local Small Businesses vs. Online Retailers?
Due to the continual increase in online sales, the issue of physical presence has become a concern. In the States’ and consumers’ minds, these sales had been essentially ‘tax-free.’ This change is a big cheer for small businesses, which many have felt it unfair that they are required to collect sales tax, yet online retailers who are becoming large competitors do not.
Previously, online retailers could avoid the burdens of tax collection and navigating state and local tax codes. Although this transition will not necessarily be quick, as some states will have to change their current laws to take advantage of this decision, small businesses and local retailers can expect to see a change in business as the playing field is leveled.
In his ruling on Thursday, Justice Kennedy wrote that “the world has changed since 1992, when mail-order sales totaled $180 million. Last year, remote sellers racked up sales exceeding half a trillion dollars,” and thus, online retailers no longer qualify for “an arbitrary advantage over their competitors who collect state sales taxes” by claiming they don’t have a physical presence in a state.
What Does This Mean for States?
States are also cheering as they have seen great sales tax revenue loss (as much as $33 billion per year) as the online purchasing network has been expanding, and sales within the state have been affected. Now the U.S. Supreme Court has basically given states the green light to have online retailers collect sales tax, just like any local retailer. Carl Davis, research director at the Institute on Taxation and Economic Policy says, “This is going to allow state and local governments to improve their tax enforcement and to put local business on a more level playing field.”
What Does This Mean for Consumers?
As consumers we may find ourselves paying more for online purchases. Although this may be true in some cases, those of us who love Amazon may see little to no effect, thank goodness, as Amazon enforces sellers to collect sales tax from many states already! The largest impact on us will be among our transactions to the smaller online retailers, such as individuals on Etsy, who currently don’t charge sales tax. Our prices may rise and their profits may decline as sales have the potential to drop. Some small business advocates are fighting to avoid this change. eBay, comprised of many 3rd party sellers, “urges Congress to step in and provide clear tax rules, with a strong small business exemption, to help small businesses take advantage of the Internet to grow and create local jobs.”
As the repercussions of this ruling continue to unfold we’ll be sure to keep an eye on changes and keep you informed. We would love to hear your opinions and feedback about how you think this will impact economies around the country from small business owners to state and local governments.