You may have heard the Supreme Court this week saying that states can now charge for the collection of sales taxes for online purchases – no matter where in the United States the seller might be. The ruling overturns a pair of older court rulings essentially saying that consumers were responsible for paying sales taxes to their state, rather than paying it through the retailer. These older decisions also stipulated that for retailers to be required to collect sales taxes on purchases, they must have a physical presence in the state where the taxes were collected.
The decision is expected to have a major impact on small online retail businesses. Here's what you need to know:
On which case did the Court decide?
The case is South Dakota c. Wayfair. The state of South Dakota has filed a lawsuit against the household goods retailers Wayfair and Overstock.com, as well as with the Newegg electronics retailer, after passing a law stating that companies E-commerce companies performed more than 200,000 transactions in the state. state residents should collect sales tax on these purchases and send the lawsuits to the state. The Supreme Court finally ruled with South Dakota, 5-4.
Which previous decision was reversed?
The most recent decision upholding the so-called physical presence rule was Quill c. North Carolina in 1992. In that decision, the court ruled that retailers could not be forced to collect sales taxes presence in a state. It still allowed states to collect sales taxes from consumers. But most of them did not know how to remit these payments, so governments rarely levied taxes on these online purchases, which caused them to lose millions of dollars in sales tax revenue.
Why did they overturn this decision?
It is rare for the Supreme Court to overturn its own decisions, especially the decisions rendered so recently. However, the technological landscape changed so much in the ensuing years that the decision felt that it was no longer practical for online businesses to avoid collecting taxes on most of their sales when other types of businesses were forced to collect them. ]
What will this change be for your online retail business?
If you sell goods online, you probably already have sales taxes on sales in your home country, since you have a physical presence there. However, you have not necessarily been required to collect sales taxes on purchases outside of your own state. Now, states can ask you to do it. It is likely that states will respond to this decision by updating the sales tax rules in the coming weeks.
Have any states ever levied sales taxes on purchases made from sellers outside the state?
Yes, 31 states had already passed legislation requiring a sales tax on these purchases. The laws vary in their exact implications. This table from the Tax Foundation describes the laws of each state before the decision.
What is the impact of an online sales tax?
There are divergent thoughts on this subject. But essentially, the decision means that states can now force businesses without a local physical presence to collect sales tax on purchases made by customers in the state. Major retail chains like Walmart already have physical stores in all states, so they were already collecting these taxes. And leading online retailers like Amazon also have warehouses in tons of places. Thus, small retail stores that sell online on one state, Etsy sellers and independent e-commerce businesses that no longer have homes are the ones that need to make a change. Basically, they will have to play according to the same rules as the Walmarts and Amazons of the world.
US President Grover Norquist said in a statement: "Today, the Supreme Court said" yes, you can be taxed by politicians that you do not elect and who act knowing that you are helpless " to object. "used to export sales taxes, personal income taxes and corporations, and opens the door to the European Union to export its tax burden to US companies – as they requested. "
Small Business & Entrepreneurship Council President and CEO Karen Kerrigan said in a statement: "Small businesses and Internet entrepreneurs are not being served by this decision at all. The precedent that a company must have a physical presence in a state before being forced to levy sales taxes on distance sales was a solid standard, but has now been overturned by the US Supreme Court. . The decision will create havoc for small businesses and the market, and opens the possibility that states can use this decision to adapt their new taxing power beyond Internet sales. The dissenting judges were right in their conclusions. As Chief Justice John Roberts said in his dissent: "Any changes to these rules that could disrupt the development of such a critical segment of the economy should be undertaken by Congress." Now the Congress must finally intervene. In fact, it must do so immediately given the many unresolved issues and issues raised by the decision. This creates uncertainty, havoc, new costs, and exposure for small businesses. The fact that small businesses must now act as tax collectors for thousands of separate state and local jurisdictions is outrageous. "
Others, such as Vice President of the Foundation for Innovation and Information Technology, Daniel Castro, have the impression that it is a step in the right direction. Since there were also large online retailers who took advantage of the physical presence rule, he argues that the rule sets the rules by ensuring that all businesses must follow the same rules. He said in a statement: "Today, the Supreme Court ruled that states may require businesses out of the state to collect sales tax on consumers, even if they do not. Do not have a physical presence.This decision ensures that large online businesses can not operate as tax havens for virtual sales, allowing consumers to avoid paying their fair share of sales taxes and compete unfairly from other online retailers and brick-and-mortar.The decision is the right step forward for the digital economy.Electronic Commerce has grown. "
What will this decision cost my company?
The decision means that states can collect sales taxes on purchases. So the money comes from consumers rather than companies. However, this means that the sales tax will have to be taken into account in the total cost of each transaction, if the buyer comes from a state charge of online sales tax. Prior to the decision, customers were likely to have these costs taken into account in purchases from large chains like Walmart, but no independent sellers in the Amazon market. This could make your products less competitive in terms of price, which could lead to a loss of customers.
How can my company comply with this decision?
The issue of compliance is an important issue for independent retailers, as different states and communities have different tax rates and rules. There is software dedicated to helping online businesses collect sales tax for different states. Although this is likely to be an additional cost for your business, it is probably more effective than trying to process these items manually.
Does this decision affect offline businesses
Not directly. If you have a brick and mortar business, you should already collect sales tax in the state or states where you operate. However, many traditional retail businesses have suffered in recent years due to increased competition from online retailers, with whom they often could not compete on price. So now that online retailers will have to collect sales taxes on all relevant purchases, this equates this part of the playground for small local shops. However, this does not change other operating cost differences between physical and online businesses, such as overhead.
Could this lead to other changes?
Some industry associations and some advocacy groups are concerned that the physical presence rule may set a precedent and require states to extend their sales tax collection to other online businesses such as service providers or to adopt other rules. retailers.
As Castro notes, "… not all states have participated in efforts to streamline their sales tax systems. In addition, states have adopted discriminatory laws and regulations against online businesses to stimulate local businesses. Congress should continue to monitor and resist attempts by states to impose an excessive burden on e-commerce, and policymakers should encourage states to streamline their sales tax systems before asking vendors to collect sale. which will ultimately be passed on to consumers. "
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