For several years, e-commerce companies have enjoyed a tax-free advantage over traditional brick-and-mortar retailers, as many of these online purchase were essentially tax-free unless ordered from a company operating in the same state as the customer. Many states and local governments have argued that they are missing out on tens of billions of dollars in revenue each year as a result of this tax loophole.
However, on June 21st, 2018, the Supreme Court 5-4 ruling in South Dakota v. Wayfair granted the state authority to impose sales tax obligations on out-of-state transactions which could affect remote sellers. This ruling overturned the 26-year-old precedent established by the Quill Corp. v. North Dakota case, which ruled that catalog retailers (Quill in this case), did not have to collect sales tax in North Dakota if it did not have a physical presence in the state.
The impact of this recent ruling cannot be overstated as it will likely have a dramatic impact on American companies, local governments, and consumers for decades to come. According to the Government Accountability Office, up to $13 billion more in sales tax could have been collected in 2017 if states were allowed to require sales tax from online retailers.
Online giants like Amazon have already expressed strong support for having a national standard for sales tax collection instead of retailers having to navigate a hodgepodge of state laws. Supporters of the ruling express that applying an internet sales tax to online retailers creates a level playing field for all. While fairness sounds like a good thing, opponents of this new ruling are concerned that it will have a disproportionate impact on small online retailers who cannot afford the increased compliance burden and reduced business.
However, not everyone agrees with this analysis. Some ecommerce retailers have noted that this ruling also has the potential to create a new national standard – if other states adopt this practice. This could lower obstacles for smaller online businesses that may be currently struggling to harmonize disparate state tax regulations. Even though it may take some time to witness the full outcome of this new ruling, the rest of this article will address how ecommerce companies can prepare themselves for the implementation of new sales tax regulations.
What the South Dakota v. Wayfair Ruling Means for Ecommerce Companies
One key implication for companies selling online goods is the need to prepare to start collecting taxes in North Dakota and many other states before the end of this year. This will likely result in companies investing in new technology, such as ERP and sales tax software.
Although,one problem for online retailers will be navigating the complexity of being subject to multiple different tax jurisdictions across their online transactions – and making sure they charge the correct sales tax for each transaction. According to an October 2017 Report from tax software vendor Vertex Inc., there are now at least 10,814 sales tax jurisdictions in the United States. And according to a September 2017 Report from Vertex Inc., there were 398 sales tax rate changes in the first six months of 2017 – an increase of 30% from the 305 changes that occurred in the first six months of 2016. To frustrate matters further, sales tax imposed by local and regional governments have no direct correlation between ZIP Code boundaries.
This complexity is largely why most online retailers turn to sales tax automation software companies to ensure compliance with state and local tax authorities. For online retailers running an ERP and an external e-commerce system, it is an increasingly uphill challenge to ensure that taxes are collected in a consistent manner in the absence of a solution to keep both the sales tax tables on the e-commerce platform and the ERP in sync. For these companies, a tax engine solution will almost certainly be needed moving forward.
Next Steps for Online Retailers
Online retailers have asked what impact this new ruling could have on their business. They’ve also asked what steps they can take to prepare for likely changes in state sales tax laws for online retailers. Now that the Supreme Court has paved the way for states to collect taxes from online retailers, even if they lack a physical local presence, companies need to be prepared to comply with upcoming interstate tax laws.
It’s a little too soon to predict what the states will do. Online retailers will need to be vigilant of sales tax developments in all states where they do business, including both nexus and shipping. However, companies should make sure they are prepared to start collecting sales tax in all states where they conduct business – even the retailers that are exempt from collecting sales taxes.
Wholesalers, for example, are mostly exempt from sales taxes but should make sure they collect exemption certificates from their customers to ensure they are complying with local laws. If your company has not yet considered sales tax automation software, it may be a good time to look into this.
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