The Supreme Court recently ruled that states can now require the collection of sales taxes for online purchases, regardless of where in the U.S. the seller might be located. This ruling overturns an older court decision (1992) in which traditional retailers claimed that they were at a disadvantage with online competitors.
“National retailers with actual stores were already required to collect the taxes, while internet-only competitors and upstarts could sometimes skip them, making their online goods look cheaper,” says Bloomberg.
While the news may come as a welcoming change for retailers that have experienced some brutal times with escalating bankruptcies, store closings, and big chain liquidations, what does it mean for online retailers?
In order to help small online retail businesses understand how they will be impacted by this ruling, we’ve outlined the points you need to know:
How Will this Change Our Online Business?
If you sell goods online and have a physical presence in your home state, you’ve probably already been collecting taxes on sales made there. Until now, though, you weren’t necessarily required to collect sales taxes on purchases outside of your state.
With the new ruling, however, states can require retailers to do so. You can expect to see updated sales tax rules in the coming weeks as states respond to this decision.
Please Explain the Impact of an Online Sales Tax
Essentially, with the new ruling, states can now force businesses without a physical local presence to collect sales tax on purchases made by customers in the state.
While large retail chains like Walmart—with physical stores in every state—were already collecting these taxes, it’s the small retailers selling online out of one state, along with Etsy sellers, and independent e-commerce businesses operated out of homes, that will need to make a change. In other words, everybody now has to play by the same rules.
The ruling “finally brings sales tax collection into the internet age,” Best Buy said in a statement, “and reinforces the basic American notions of fairness and a level playing field for all who choose to compete in the marketplace.”
How Will it Affect My Business Costs?
The good news is, that even though your state can collect sales taxes on purchases, the actual money will come from consumers, rather than your business. On the other hand, it also means sales tax will need to be factored into the total cost of each transaction if the buyer comes from a state charging sales tax online.
“Prior to the ruling, customers were likely to have those costs factored into purchases from major chains like Walmart but not from independent sellers in the Amazon marketplace,” says Small Business Trends. “So it could just make your products less competitive when it comes to pricing, potentially leading to a loss of customers.”
How Does My Business Comply with the New Ruling?
For independent retailers, the issue of compliance is a major concern because different states and communities vary in tax rates and rules.
Small Business Trends suggests looking into software programs dedicated to helping online businesses collect sales tax for various states. Many POS systems also have tax capabilities to make the collection of state taxes easier.
While tax-friendly software can be an added cost for your business, it’s far more efficient than trying to manually process tax-sensitive transactions.
How Does the Ruling Impact Offline Businesses?
Indirectly. You should already be collecting sales tax in the state or states where you operate if you have a brick and mortar business. That being said, in recent years many traditional retail businesses have struggled in the face of increased competition from online retailers because they couldn’t compete on price.
Because online retailers will now have to collect sales taxes on all relevant purchases, it helps to even the playing field for small local shops. Unfortunately, it won’t help alleviate other disparities in operating costs—like overhead—between physical and online businesses.
Going Forward From Here
“The long-term impact of the Supreme Court’s decision remains to be seen,” says Bloomberg. According to the Government Accountability Office, states were already collecting about 75% of the potential taxes from online purchases. The GAO went on to say that the portion not being taxed could reach as much as $13 billion a year.
“No one thinks that sales tax is the only thing that drives sales to one retailer over another, but it certainly is a thing. The magnitude of the price differential should really be enough to make a real difference to consumer decision making.”
Source: Eric Citron, partner with Goldstein & Russell via Bloomberg
According to some of the big online retailers, smaller companies could be the most impacted by the decision, due to lack of staff who can properly and efficiently follow tax procedures across thousands of U.S. tax jurisdictions.
“The burden now is reporting in over 9,000 jurisdictions, and will put many sellers in jeopardy.”
Source: Robert Roque, managing director of Beautyvice via Bloomberg
The online tax ruling may produce more legal questions since states can potentially begin passing their own statutes with the goal of raising revenue from online retailers. The decision may also spur Congress to pass a law setting a federal standard dictating which companies have to collect the tax (the statute in South Dakota, for example, requires collection for retailers with more than $100,000 in annual sales).
As Seeking Alpha points out, price advantage is not the only factor that has driven online retail. Perks such as convenience, selection, 24-7 availability, quick and flexible shipping options, and mobile access, have propelled the rapid adoption of online sales.
“If it was intent of the Supreme Court to ‘take away an arbitrary advantage’ and level the playing field, it is not likely to help most traditional retailers,” says Seeking Alpha. “It is up to traditional retailers themselves to level the playing field by offering shoppers a desirable destination and a reason to buy merchandise in their stores.”