South Dakota vs. Wayfair: A Changing Tax Landscape

Update: As of June 21, 2018, the Supreme court has ruled to overturn North Dakota vs. Quill in a 5-4 decision which gives states the right to compel online retailers to pay sales tax. More updates to come.

In 1992, the US Supreme Court’s ruling of North Dakota vs. Quill Corp decided that a business did not have to collect sales tax in states where they did not have a physical location. For more than 25 years, that’s been the standard for online business. If your online business is headquartered in Georgia, your Georgia customers have to pay sales tax, but customers from most other states don’t. Sure, some states have found ways around this. When I ran my online business back in 2005, some states would use any loophole they could to collect the sales tax that they felt they were due. Often we didn’t fight it, because who wants to spend the money to fight a state?

But now, the US Supreme Court is deliberating on a new case which could turn North Dakota vs. Quill Corp on it head. South Dakota vs. Wayfair is working its way through the Supreme Court; a decision is expected in June. South Dakota claims that Quill gives an unfair edge to online retailers. Brick-and-mortar retailers suffer because they have to collect sales tax and online retailers don’t, which stifles competition. A Supreme Court decision in South Dakota’s favor could effectively repeal Quill for all states.

What does this new case mean for online retailers? What possibilities should you be aware of, and how can you prepare?

The Argument

You can see the argument from both sides here. We can empathize with the small camera shop in South Dakota, working hard to make that sale. The salesman shows each option to the customer, spending their time and expertise to explain the pros and cons of each model. And then the customer goes home and buys the salesman’s recommendation online to save the $10 in sales tax. It’s a common story. It’s already tough for the brick-and-mortar retailer to compete with an online store that can cut costs with lower overhead. Online stores don’t have to maintain a physical presence, pay salespeople, and stock shelves. And thanks to Quill, they don’t have to charge sales tax. This naturally hurts small brick-and-mortar businesses.

On the other hand, online retailers are often small businesses too. The eCommerce business owner works hard to find whatever edge they can in a landscape saturated with competition.

Sales tax can make a significant difference on a retailer’s bottom line. Sometimes the money a consumer can save on sales tax is the deciding factor when they’re choosing a retailer. (The same goes for shipping, but that’s another story). According to an Internet Retailer survey in January, 39% of consumers said they’ve actively looked for an online retailer that does not charge sales tax to save money, and 36% of consumers said they would shop online less frequently if all retailers were charging sales tax. The money states believe they’re losing is no small amount either. Estimates for lost revenue from out-of-state vendors run between $13.7 and $23 billion per year.

Another consideration is administrative overhead. Brick-and-mortar retailers only have to worry about one state’s tax laws and regulations—whichever state their store is in. Right now, online retailers also collect sales tax for in-state sales, but not for out-of-state sales. Should the Supreme Court change their stance through South Dakota vs. Wayfair, that would change dramatically. Online retailers would need to start collecting sales tax in all states, regardless of where they’re located. They would have to comply with the tax jurisdictions and laws of each state… and there are 12,000 tax jurisdictions in the US. For a small eCommerce operation, keeping track of what you owe to whom and where would be no small task.

You could argue that this doesn’t even the competitive playing field; it just shifts the imbalance far to the other side.

Another aspect worth pointing out is how large retailers like Amazon will view this change. I think Amazon will be in favor of this. Why wouldn’t they be? They operate fulfillment centers in so many states, and they already have to collect sales tax for each of those. This won’t be a big change for them, so it just gives them even more of an advantage.

What does this mean for me?

This pending case has a lot of online retailers asking some big questions: If this passes, how will it change how I do business? Can I afford to do business if I have to know all of these tax laws and codes, and then follow them all? What does this mean for me in a concrete, practical sense? How can I prepare for this?

The answers to these questions will vary for every retailer. That said, there are some practical steps we recommend taking now. They’ll give you a better picture of what this change could mean for you, and help you find a good starting point for your business.

  1. Evaluate your past sales. Look at all of your sales and where they came from. Are there more sales coming from certain states? Determine the states where your sales are most concentrated and you’ll have a pretty good place to start in preparing for that state’s tax laws.
  2. Find someone who can help. If (like most people) you aren’t a tax guru, find someone who is. Enlist help in evaluating your business and identifying possible weaknesses you might have. Be prepared for what may come. Even if this specific ruling does uphold the current laws, it won’t be the last time this issue is brought up.
  3. Look at software. Software partners like Vertex, Avalara, and TaxJar can help you be proactive. These services monitor the tax jurisdictions and take a lot of the pain out of collecting sales tax. This solution may not be in everyone’s budget, but if you can afford it, you should definitely invest in it. These services can save you a ton of headaches down the road.

Now We Wait

It looks like the Supreme Court is split at this moment. We probably won’t see a final decision until sometime in June, so for now, we wait. This could be a big shake-up in the eCommerce world. It would be a shift that could either make or break a business. The courts have a lot to think about here, and they aren’t taking the decision lightly.

The thing to remember here is don’t panic. No matter how the door swings, there are ways to get through it. The more prepared you are, the better off you will be.

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