Overview
The Supreme Court recently ruled on a 20+ year old debate about online sales tax collection. The ruling permits states to move forward with tax collection for online sales. This means that each state can enact their own taxes. Retailers need to be aware and prepared for these upcoming changes.
What was the background for the ruling?
The heart of the issue were two Supreme Court rulings that sent mixed messages about the collection of sales tax. Before the new ruling, it was generally accepted that online sales tax would be collected if the business had a physical presence in that state. Many online shoppers benefitted by opting to make purchases online to save on sales tax, and often retailers would advertise that online sales could be made without sales tax. The argument was that this practice hurt local small businesses with a “judiciary-created tax shelter”. The new ruling by the Supreme Court gives states the power to collect sales tax regardless if a business is physically located in the state.
South Dakota (one of the states in the proceedings) relies solely on sales tax because it has no income tax. Therefore, it would make sense that states like South Dakota would have an interest in clarifying the tax collection issue which could be a boost of around $50 million for South Dakota alone. A coalition of 24 states has formed to create a streamlined tax initiative and has set forth guidelines that the Supreme Court blessed. The coalition is pushing two main points:
- If a business makes less than $100,000 in sales for that state or fewer than 200 transactions in that state, they do not have a significant presence and no taxes are due.
- The initiative also provides free software for the business to help collect and pay taxes properly, and using the software gives them audit immunity. The issue will ultimately be between Congress and the states to roll out, but the Supreme Court ruling favors a simple, single tax per state.
How will this change affect me as a shopper?
As a shopper, you are likely to notice that sites will begin to charge sales tax for purchases. Some online retailers like Amazon, Walmart, Target, and others already do this. In the future, you’ll see new taxes implemented for all online purchases. There doesn’t seem to be a strict timetable, but it seems likely that states will begin enforcing this soon to collect on tax revenue.
How will this change affect me as a retailer that sells online?
As an online retailer, this means that a transformation plan to collect sales tax per state will be needed – eventually. However, since the issue is now in the hands of the individual states (and some states have no ruling laws yet), now is a great time to begin planning how tax collection changes for your business. Many popular e-commerce platforms can monitor and assist with tax collection and even integrate into third party tax services.
Which states have laws regarding tax collection and nexus?
Here’s a list of online tax collection by states at TaxJar. Many states have laws that begin on July 1, so it’s believed that the list can change soon.
Where can I learn more about these changes?
Two great resources are TaxJar’s blog post, and Nolo’s post. Of course, making sure to discuss this with your attorney and accountant is the way to get the best advice for your business.
