More than 25 years ago, the US Supreme Court rendered a decision that would have profound implications as e-commerce evolved. The decision in Quill v. Heitkamp in 1992 meant that online retailers who had no physical presence in a state did not have to collect sales tax from customers in that state.
Just a week ago, the court overturned this position. In its decision on the South Dakota v. Wayfair, the court quashed Quill v. Heitkamp and paved the way for states to enact a law requiring online traders to collect sales tax.
Not a new battle
Traditional retailers have long sought to overturn the 1992 decision, claiming that it gave e-commerce providers an unfair price advantage. In 1993, Congress introduced the Fair Market Act, which would require distance sellers, including online businesses, to collect sales tax in eligible states, but this is not the case. is never produced.
Prior to the Court's recent decision, online businesses were required to collect sales tax from online sales if they had a connection – a physical presence – in that state. The case has decided this week centered around South Dakota by expanding the meaning of the inclusion of a financial bond, which exists if a company reaches a certain level of income.
This month, just before the final decision, Illinois passed a budget bill that adopted the standard of the South Dakota Economic Nexus; Iowa did the same thing in May.
This is not the first time that the meaning of the nexus has been reinterpreted. California has successfully extended the concept to include affiliated traders, which has led several other states to implement affiliate laws.
Technically, taxpayers in most states are expected to pay a use tax on items that they purchased online from non-state companies. But only a small number of taxpayers pay it. According to this 2013 NPR article, only about 1.6 percent of taxpayers in the 45 states that require it to pay, and if all that tax was collected, states could recoup an additional $ 11.4 billion a year .
Great victory for the states, big blow to the SMEs
Sylvia Dion, Founder and Tax Administrator of the National and Local Tax Consulting Firm (SALT) PrietoDion Consulting Partners LLC, said the "decision is a huge win for the states , [but it] will not be the only payers who will be most affected – this will be the small and / or medium size online retailers. "
"States do not waste time," Dion said. "Many of the laws on economic ties in [states that are adopting them] affirm the link based on a taxpayer outside the state making sales in the state of more than $ 100,000 or 200 separate transactions or plus – they are almost exactly like the law of South Dakota. "
Dion said that these laws on financial ties can cause problems for SMEs:
Although the $ 100,000 threshold is a fairly high threshold, I am very concerned about the "200 or more separate transactions" because many small online retailers may be affected by these laws. In addition, most of these laws stipulate that if the revenue threshold or the number of transactions is reached, the out-of-state retailer has a link and is subject to the registration, declaration, perception and surrender. Now, consider a small online retailer whose product sells for $ 10 – 200 transactions would only be $ 2,000 in sales. I think a lot of people do not focus on the "OR" language in these economic laws.
Could he bring businesses back to brick and mortar?
Neel Grover, founder of the Indi.com engagement platform, which also includes physical stores, said this initiative could entice online marketers to settle in traditional stores.
"I had been waiting for this change for some time now," Grover told me. "This will benefit the biggest players in e-commerce, like Amazon, because they have already billed the national sales tax because they have established distribution centers across the country to get closer to the customer." I think it will also accelerate other pure-play online retailers to create physical stores and expand their affiliate relationships, because the physical presence will no longer be a problem.What remains to be seen is if something will change with markets (Amazon, eBay, Etsy, Rakuten), as they generally support small long-tail sellers. "
Not as easy as it looks
Dion says there's a lot more than just "plugging software and pushing numbers and payments to a state."
You see, state sales tax laws are complex and not uniform – and I'm not just talking about different rates – these are differences in the way states tax certain items.
For example, clothing may be fully taxable, partially exempt or totally exempt depending on the state. Massachusetts, for example, exempts individual clothing items from a selling price of up to $ 175; The Connecticut partial clothing exemption has changed several times in recent years, and Pennsylvania generally exempts clothing, but not all types. Another problem is that in states that exempt clothing, how does each state define clothing – are belts, watches, hats considered clothing too?
Dion said that being registered in several states could cause headaches.
"An out-of-state clothing retailer with Nexus in a faraway state would need to deal with these rules and nuances," Dion said. "And once a company is registered, states will send notices of tax rate changes (and yes, there are more than 10,000 tax jurisdictions in the US), notices of change of frequency, questionnaires to determine if a newly registered taxpayer has taxes other than sales taxes, etc. "
The real result remains to be seen
Unsurprisingly, the National Retail Federation (NRF) applauded the move.
In a press release, NRF President and CEO Matthew Shay said:
Retailers have been waiting for this day for over two decades. The retail sector is changing, and the Supreme Court has acted correctly in acknowledging that it's time for outdated sales tax policies to change as well. This decision paves the way for a level and equitable playing field where all retailers compete under the same sales tax rules, as they sell merchandise online, in-store or both.
It is fair to say that e-merchants knew that day would come. Since the original decision in 1992, states have consistently found new ways to expand the definition of nexus to recover sales tax that they believe they deserve online retailers. But now that states have gotten their way, only time will tell how this will really affect the bottom lines of e-tailers.