Recently, the Supreme Court has ruled in favor of states collecting sales tax for online purchases nationwide. According to Fox News, the Supreme Court called the current rules surrounding state tax “unsound and Incorrect”. However, the new ruling will have serious implications for online retailers.
At the moment, businesses do not need to collect the state sales tax if they are sending a product to another state that “does not have a “physical presence”, such as a warehouse or a store. However, the Supreme Court has deemed this rule obsolete given that most consumers do their shopping online, and many sellers operate remotely. As expressed by Justice Anthony Kennedy, “When the day-to-day functions of marketing and distribution in the modern economy are considered, it is all the more evident that the physical presence rule is artificial in its entirety…”
Roughly 20 years ago, online sellers were exempt from the sales tax. However, with the rapid global rise of e-commerce, this is becoming an issues for States. In fact, the Commerce Department stated that e-commerce makes up nearly 10% of all retail sales in the United States. They are reporting that they are missing out on significant revenue because online sellers are not paying the tax.
Moreover, Justice Anthony Kennedy declared that the current rule regarding state sales tax is “unfair and unjust” to local and out-of-state businesses that must remit the tax, consumers who pay the state sales tax, and the states that wish to enforce the sales tax in a fair manner among all competitors.
The 5-4 ruling is being backed by 41 states and led by South Dakota, which is “requiring the collection of sales tax on Internet vendors with at least 200 yearly transactions or $100,000 in sales to its residents.” (Fox News) They are arguing that the problem is getting out of hand as e-commerce continues to grow internationally. Their hope is that the new sales tax ruling will help solve the issue.
What does this mean for e-commerce businesses?
While the new state sales tax ruling appears to be fair on paper, forcing all companies to pay the sales tax, it also puts smaller competitors at a great disadvantage. For example, there are many small e-commerce businesses, or even business owners that run their company from a home office, that will struggle to adhere to the tax rules of all states.
According to Fox News, many states have reported that they are losing billions in revenue due to businesses that do not comply with the sales tax rule. They added that they are supported solely by large corporations, like Walmart, who pay the tax. Billion dollar companies like Wal-Mart can easily comply with the sales tax in every state. Small businesses that operate remotely or from a home-office, however, would have more difficulty in doing so simply because they do not have the same margins as large, nation-wide companies.
The new sales tax rule will be a challenge for e-commerce businesses as they will likely need to increase the prices of their products to cover the sales tax. In turn, an increase in prices may lead e-commerce businesses to lose out on sales.