Photo: UPS
Supreme Court rules e-tailers must collect state sales taxes
The U.S. Supreme Court has ruled that online sellers must collect sales taxes in states where they exist. Groups representing retailers have hailed the ruling in the case, South Dakota v. Wayfair, as the means to level the playing field between e-tailers and local retailers.
The ruling upheld a 2016 law that required online merchants with more than $100,000 in annual sales to South Dakota residents or more than 200 transactions to collect the state’s sales tax.
With a 5-4 decision, the court overturned the 1992 Quill v. North Dakota ruling that prevented states from collecting sales tax from sellers unless they had a physical presence in the state where a sale was made.
“Retailers have been waiting for this day for more than two decades. The retail industry is changing, and the Supreme Court has acted correctly in recognizing that it’s time for outdated sales tax policies to change as well,” said Matthew Shay, president and CEO of the National Retail Federation, in a statement.
Deborah White, general counsel for the Retail Industry Leaders Association and president of the Retail Litigation Center, said, “Today’s decision culminates years of tireless work by the retail community to reverse a pre-Internet era rule that distorts free markets and puts local brick and mortar stores at a competitive disadvantage with their online-only counterparts.”
One of the arguments made against requiring retailers to collect sales tax is that it would place an undue burden on small sellers. The court’s ruling shows it has sided with those that argue that manageable technological solutions are available to address this concern. Keeping small sellers operating will be a key concern for companies such as Amazon.com, Walmart and others that operate online marketplaces.
Amazon, which has been a favorite target of President Trump largely because its CEO privately owns The Washington Post, is among the least likely e-tailers to be affected by South Dakota v. Wayfair. The e-tail giant already collects sales taxes from customers in the 45 states and Washington, D.C. that have such fees in place.
Research by Slice Intelligence in 2016 found that Amazon’s direct sales to consumers and its market share were not adversely affected in Colorado and South Carolina after it began collecting the sales tax in those states.
- NRF Says Supreme Court Sales Tax Ruling Creates ‘Fair and Level Playing Field’ Between Online and Local Retailers – National Retail Federation
- WayFair Decision a Win for Retailers, Free Markets and Fair Play – Retail Industry Leaders Association/PRNewswire
- Will Quill rewrite the rules for e-commerce? – The E-Commerce Observer: Ken Takes on the News
Discussion Questions
DISCUSSION QUESTIONS: Do you approve or disapprove of the Supreme Court’s ruling in the case of South Dakota v. Wayfair? What are the implications of the ruling for retailers online and off?
Poll
BrainTrust
Nikki Baird
VP of Strategy, Aptos
James Tenser
Retail Tech Marketing Strategist | B2B Expert Storytelling™ Guru | President, VSN Media LLC
How can I not approve? It’s the right ruling for the digital age. It may affect sellers of very expensive stuff, but I don’t see it having a huge impact on online retailers in general. But then, I’m not poor enough to spend time scouring through websites, etc. to see if they’re charging tax.
Of course there’s software out there that does tax calculations and stores it in databases so that it can be paid. If the states are going to try to do audits on those firms, they’ll lose as much money as they’re going to make.
I’m surprised the vote was as close as it was. It’s the right thing to do.
Great point Paula, I think most shoppers look at a seller’s rating way before they look at whether or not they charge sales tax. I don’t expect this ruling to change the buying patterns of many shoppers.
“Of course there’s software out there that does tax calculations and stores it in databases so that it can be paid.”
Yes, of course: and the forty-seven annual (or quarterly, or monthly) tax returns will magically file themselves too. For smaller firms with maybe a half dozen or fewer persons in their entire acting department, this could prove a substantial burden … even to verify they don’t have to report anything.
Great overall points, but you are missing one negative from this decision. Yes, there are plenty of solutions for sales tax calculations and reporting, but unfortunately for many small- to mid-size e-tailers who will fall into the current guidelines of over $100K or over 200 sales in state, there is not a system to file and pay taxes in these states. Great business opportunity to solve this problem!
As internet commerce was building in the mid ’90s, the Clinton administration (led by White House advisor Ira Magaziner) determined that the rules of commerce that govern physical retail should apply to online. No rigorous enforcement has been undertaken to reflect this, in part to enable the growth of online commerce. Now is the time. Commerce is commerce.
A significant injustice has been corrected. Finally. Not only from the consumer point of view but also from a tax point of view, it really does not matter whether the seller is a traditional retailer or an e-tailer. There should have never been a difference. Anyhow, better late than never, I would say. It is surprising that this has taken so many years to correct this. Incredible!
The concern for retailers like Wayfair is that their prices will now effectively rise across many states. This weakens one of their competitive advantages over both physical players and those larger online and omnichannel retailers which have more of a national presence. However, this outcome is fair. It means that all retailers will now compete on a level playing field.
Disruption and disintermediation are the goals of many entrepreneurs. More power to anyone who can shift a model and discover a competitive edge.
At the same time, there has to be a boundary of fair play in the marketplace. Requiring online retailers to collect sales tax as promulgated by this decision restores a fair boundary for all retailers.
Now, let the competition begin again. With this obstacle taken off the table, will we see offline retailers be able to take advantage and reverse their fortunes in any way?
This decision makes ultimate sense. Sales taxes were instituted when there was no online business. Though the retailer sent the check for the taxes, the taxes were a tax on the resident of the state, not the retailer. No matter where the retailer does business, the tax is a tax on the resident, not the retailer and the retailer should forward the check to the appropriate jurisdiction.
With regard to hurting online sales? Not at all.
I approve of the ruling. As pointed out, local brick-and-mortar stores have been at a price disadvantage and the Supreme Court’s ruling levels the playing field. Clearly this ruling will have a significant impact on all pure-play online retailers. First, they now must collect state tax which makes their prices less attractive and, second, they will have additional administrative overhead to manage the collections and process government filings. With the tax advantage gone, I would certainly expect to see more consumers buying from local brick-and-mortar stores, and that’s good for the industry.
As someone who lives in Colorado, who has been required to report (and pay) my own sales taxes to the state for anything I buy online, which is kind of a ridiculous undertaking (and an exercise in “did I really spend THAT much with Amazon this year?”), I am just relieved. I’m probably more honest than many of my CO citizens and, let’s face it, not that incentivized to be very accurate about it — it’s definitely a game of “how much can I guess I spent that will keep me from being an audit flag?” So I am overjoyed that this will no longer be a game of chicken I have to play with the state every year.
As for the small businesses, I’m sorry. I’m just not that sympathetic. There ARE tech solutions out there that make it easier, and if those are too much of a burden for you, then don’t sell to other states. It’s apparently not that much of a burden to take the order and ship to someone in another state. So just do what it takes to collect the tax and pay it to the right governing authority and let’s get on with life! It has been clear that online exemptions have taken too much away from localities that need the tax revenue. Personally, I like fewer potholes and better schools. So let’s stop giving a free pass to companies that clearly do have a local impact, thanks to delivery trucks, even if they have no actual local presence.
This COMPLETELY makes sense! For years online has had an unfair advantage over the brick-and-mortar retail business. Most retailers have both, but it still burdens one business with taxes unequally.
The implications are that retail is retail. Regardless of channel and method of purchasing, laws and taxation applies equally for each method. It is a step forward. It clarifies things, as retail continues to grow with different creative ways of purchasing products and having them delivered/picked-up.
E-commerce is significantly different today than it was in 1992. And tools exist to collect sales tax. Much as consumers have enjoyed buying items online tax-free, the time has come to collect the necessary sales taxes. I doubt this will greatly effect online sales. Amazon has been collecting sales tax for a few years and their sales continue to soar.
As we all know, this was just a matter of time. Even the smallest online pure players can leverage cheap software to manage this new cost of doing business. Smart retailers have been preparing for this inevitable change for years. On a side note, I wonder how well this new influx of revenue will be wasted by the biggest states, like my ex-home of Taxifornia.
Amazon has been lobbying for this. Why? It used to be you could sell your goods out of your basement anywhere in the U.S. and at a fair price. Now, if your operation sells mostly to New Yorkers or Californians, etc. there’s a big downside. Unlike huge retailers who can take from one big kitty (or AWS) and save the day or win on pure convenience when they compete in high-tax states, no such advantage will happen with smaller retailers. A lot of little e-commerce guys will go out or have to sell through Amazon, but not the real problem competitors for brick-and-mortar. It’s a big company bonanza. Especially for Amazon.
Of course it is the right thing to do. They say there are two truths in our world, death and taxes. It was only a matter of time. The tools are available to help smaller retailers and with little expense. For my two cents.
We talk about how physical retailers can keep up almost daily. This will do more to at least allow those that do truly want to compete to have a fighting chance to do so. The old ruling of not having a physical presence in the state was somewhat misguided. Although the product may come from an online retailer, the actual package is delivered by a UPS driver whose distribution center is located in the state, and so on.
This ruling is not only overdue but the correct thing to do. The rules of commerce should apply to all — regardless of the path of purchase. The original law was put into play to encourage the development of online commerce under the Clinton administration. I’m certain Mr. Bezos had a hand in influencing these laws and has certainly proffered from them for the past 15+ years.
This was inevitable and, realistically, long overdue. While some consumers may complain, I suspect the reality for most shoppers is that they won’t notice because so many online retailers were already collecting sales tax in states they had a presence in for distribution or otherwise. Where this will be felt the most is by smaller online-only sellers who will see this as a burden. However, the burden is really on the payment and e-commerce systems they use and for those vendors to ensure they have the functionality built in for all states. It’s possible some of these smaller sellers will migrate to marketplaces like Amazon who no doubt will advertise to prospective sellers that they can handle this processing for them. The net effect is that we will have a level playing field again and the sales tax issue will no longer be a competitive point for online vs. physical retailers.
Holy crap this is long overdue! I’ve been tracking and writing about this issue since the 2000 presidential election and it’s high time the online sales tax loophole was closed.
What’s most significant about South Dakota v. WayFair is the ruling that says merchants must collect the sales taxes in effect at the recipient’s address. This is VERY important and absolutely the only correct model. It wipes away the antiquated concept of “nexus” required by the 1992 Quill ruling which effectively required customers to file their own sales taxes (an impossibly complex task which made nearly every American a tax cheat).
While the ruling seems to focus on state sales taxes, I hope it will ensure that local municipalities will finally collect their correct share of online sales tax revenues as well.
While I agree with the decision, compliance will not be as easy as most think. Finding the correct tax rate to charge is easy, even in home rule states. The compliance burden will arise from all those cities and counties a seller will have to register in but where it may only have occasional sales. This creates a mountain of zero file returns on a monthly/quarterly basis. States should ease the reporting burden to make compliance easier, especially for small businesses.
Sorry Joe, but the process will likely be fully automated using algorithms built into the online shopping carts. Check out Avalara, a vendor who has been building its solution for many years in anticipation of a ruling like this. (There are several competitors.)
Most merchants won’t have to lift a finger, other than subscribing to a cloud-based service and embedding it into its online shopping cart. Accountants will be needed primarily to audit the services, not to file returns.
No municipality will want the administrative burden of reviewing a mountain of “zero” returns either, so I firmly believe they will prefer to receive a smaller number of consolidated payments and statements from aggregators.
Before delving into the specifics, let’s all step back and appreciate the magic of a ruling that aligns Ginsburg and Alito (with Thomas thrown in for good measure) … who’d have thought it possible?
Now back to the merits: as my title suggests, my reaction to this is mostly along the reporting side; and though I don’t usually give much credence to those who complain about “burdensome government,” there can be exceptions. The ill-conceived (and ultimately repealed) increase in 1099 reporting a few years back was one, this could be another. It probably won’t much affect large firms who likely already remit, but regardless have large accounting staffs, or small firms who either will be exempt or will simply ignore the mandates. But for medium size firms complying with the myriad requirements of literally tens of thousands of jurisdictions could prove daunting. It will be incumbent for states who wish to levy taxes — and this ruling allows for such, but doesn’t require it — to get together and come up with practical means of attaining compliance.
I’d like to see something similar to what Arizona did a couple years back. One state form reporting all local taxes. Let the state funnel the revenue to the cities. I’m sure the states would hold on to a portion of the revenue for administrative costs, but the cities/counties would still be collecting more revenue than if the Quill law was in place. This would also mean one auditor to review records. Sorry James, but municipalities DO require zero returns for life once you register. Even the registration process can be daunting.
Upholding the South Dakota law will lead to greater imposition of sales taxes on internet sellers. Nearly everyone agrees this is a win for fairness between offline and online sellers.
But even if Wayfair had prevailed, that would not have been a mandate against state sales taxes. Fully 31 states already tax online sales, through physical nexus, “click-through” nexus, cookie nexus, economic nexus, notice-and-reporting, and so on. A win by Wayfair may have meant more states could collect sales taxes in less simplified and clear ways than South Dakota has legislated.
Either way, states’ fiscal situations have lead inevitably to creative tax regimes of one form or another for internet retailers.