Supreme Court Has Spoken: New Online Sales Tax System Explained

New online sales tax laws require online retailers and e-commerce business owners to collect sales taxes

Internet Retailers to Collect Sales Tax

The U.S. Supreme Court overturned a 26-year-old ruling that had previously made a large portion of the internet a tax-free zone.  Last month’s Scope Weekly article outlined the basis of the legal case of South Dakota v. Wayfair, Inc. before it went to hearing, and now, let’s take a look at the decision and how it will affect the online sales tax system.  

The original 1992 decision previously shielded online retailers from collecting taxes if they didn’t maintain a physical presence within a state. As a result, retailers were only required to levy sales taxes on e-commerce or online sales if the seller maintained a physical location within certain states that required tax collection.

However, the Court’s recent decision now frees states and local governments to collect sales taxes from online retailers if their sales revenue exceeds a certain figure. For the past 26 years, internet retailers have had an unfair advantage over brick-and-mortar retailers, offering consumers tax-free shopping. The Supreme Court’s 5-4 ruling in favor of the changes has now been equalized.

The ruling upholds a South Dakota law that exempts sellers generating less than $100,000 in the state, but leaves other states free to set their own thresholds.

Justice Anthony Kennedy, the author of the new decision, wrote, “each year, the physical presence rule becomes further removed from economic reality.” Kennedy also pointed out to the existence of SAS and tools that “may make it easier for small businesses to cope” with the new compliance.

When news of the Supreme Court’s decision was released, share prices for many major online retailers plummeted, including Wayfair Inc., Inc., and EBay Inc. Shares of Wayfair Inc. initially slumped by as much as 9.5% after the ruling was announced, while dropped 1.9%.

By comparison, major online retail sites like Etsy are merely platforms for many micro-business owners, often comprised of sole traders selling handcrafted items.

Etsy’s CEO John Silverman spoke up in a company’s blog, confirming that Etsy echoed Supreme Court’s Chief Justice John Roberts’ stance on the decision. Roberts said, 

The burden will fall disproportionately on small businesses. One vitalizing effect of the internet has been connecting small, even ‘micro’ businesses to potential buyers across the Nation. People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country—but probably not if they have to figure out the tax due on every sale.

Robert goes as far as inviting online merchants to sign a petition and contact their congressman to support a fair and simple solution.

How Does Online Sales Tax Work?

The online sales tax is technically not a new tax. Rather, it’s a more efficient way of enforcing existing tax laws.

Essentially, e-commerce businesses and online retailers now must charge a 4.5% sales tax on revenues exceeding $100,000 or more than 200 transactions within the state, just as they would if the sale was generated in a bricks-and-mortar store.

Online retailers such as Amazon already charge sales tax on sales made to consumers in states that impose the sales tax, but the charge only applies to products sold from its own inventory. However, those third-party merchants who sell via Amazon that don’t currently collect tax will now need to abide by the new ruling.

Amazon benefits again

Those third-party merchants have the advantage of using Amazon’s internal bookkeeping software to help keep taxes due in order. However, Amazon is the entity most likely to benefit from this agreement, as the retail giant is likely to charge them for the privilege of using their software. Taxes collected are then remitted to the state, instead of individual merchants trying to remit partial payments to each different locality around the country.

Higher Expenses for Small Online Businesses

While the new sales tax laws may be seen as an effective way to generate more tax revenue, many small online retailers may struggle to keep up with the changes.

In an effort to comply with the decision, many small business owners face increased obligations and expenses. Many will face additional costs associated with obtaining software or services designed to help them collect the taxes and remit to the appropriate state authorities. Business owners may either need to absorb the extra costs or pass them onto customers, potentially resulting in higher retail prices.

The Streamlined Sales Tax Agreement is a plan designed to help simplify tax collection and compliance for online retailers. Under the agreement, retailers are able to use a sales tax compliance service at no charge for sales transactions occurring in participating states.

The agreement may be intended to simplify the system, but there are still complications to take into account. Many business owners may need to make informed decisions about where they will collect taxes. If the business owner doesn’t expect to reach a particular state’s threshold, the company may not need to collect sales tax.

The Streamlined Sales Tax Governing Board released a statement in response to the Supreme Court’s decision, saying “As we have done over the last 18 plus years, we will continue to work with the business community to ensure that implementation of this decision is fair, efficient and transparent for all taxpayers and administrable for sellers, purchasers, and the states.”

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