The Supreme Court Tax Ruling & What it Means for Your E-commerce Business

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Since its inception, online shopping has had its clear advantages over shopping in-store: bigger selection, no travel required, online discounts, and often times lower prices. But one of its biggest competitive advantages is about to be stripped away as we know it: the tax-free advantage.

Supreme Court Tax Ruling eCommerceThe Era of Tax-Free Shopping is Ending

In the years since online shopping became a massively used practice, consumers have collectively saved billions of dollars in state sales tax because of a loophole that didn’t enforce sales tax collection for online sales.

But with the Supreme Court’s new ruling announced on June 21 in the South Dakota vs Wayfair lawsuit, that loophole is set to close.

In the near future, online merchants will be required to collect sales tax on all or most of the items they sell.

The logic here is that tax-free shopping online is putting brick-and-mortar retailers at a huge disadvantage because state laws force them to charge sales tax.

In addition, states are claiming to miss out on tens of billions of dollars that should be collected through sales tax from online merchants.

The new ruling is expected to level the playing field for physical storefronts and allow states to improve the way they enforce tax collection. Businesses that have felt the crunch of online competition for years now may finally become better positioned to compete – and survive.

What The New Ruling Means for E-Commerce Merchants

For some e-Commerce giants like Amazon and Wayfair, the ruling isn’t expected to impact their businesses, at least not much. Amazon claims they already collect sales tax in the 45 states that require it. Similarly, Wayfair mentioned they collect tax on about 80% of their orders.

But the ruling isn’t as cut and dry as it may seem.

In some cases, merchants may only be required to collect sales tax on transactions of a certain value. That is, not every sale in every state will be taxable. And, what’s taxable in one state might not be so in another.

To further complicate matters, Amazon admitted that they do not collect taxes on items sold by third parties. Third party sellers are responsible for more than half the items sold on Amazon, leaving these sellers responsible for their own tax compliance. Hotspots like ebay and Etsy are finding themselves in a similar situation.

The tricky part for online retailers, especially smaller ones with limited resources, is remaining compliant with a complex system of sales tax laws that can vary by state.

The burden of responsibility falls on the merchant to understand the tax law of the states they sell to, even if you don’t have a physical presence in that state.

Software companies like Avalara offer cloud-based platforms that help merchants navigate these complexities by state to remain compliant. Avalara automates much of the process for online merchants to determine a transaction’s taxability and the accompanying rates. Once you install the software, it logs tax details for you and applies tax amounts by state to remove the guesswork and extensive alterations to your e-commerce platform.

Solutions like Avalara can relieve some of the headaches, but it’s not an end-all solution. For starters, integrating a new platform means adding a new expense to your P&L. In the long run, it can be worth every penny to avoid potential fines and other costs associated with non-compliance. It also does nothing to give you back the tax-free competitive advantage that the new ruling is taking away.

The Silver Lining for Online Retailers

Despite the loss of this major competitive advantage, online retailers need to remember they still have several other power boosters at their disposal over traditional brick-and-mortar formats.

Things like in-home shopping convenience and a wider array of products will always be prime attractions for consumers. Consumers have long believed that online shopping is usually the cheaper option because it cuts out middlemen and overhead that can drive up prices. If sales tax amounts are equal, consumers may still find online shopping to be the cheaper option.

There’s also another big consideration that online store owners should take care to remember: consumers are already becoming used to the idea of paying taxes on their purchases. Companies like Wayfair and Amazon have been collecting taxes on their transactions for quite some time, helping to soften the eventual blow when every merchant is required to do so.

The imposition of widespread sales tax collection alone might not be enough to deter shoppers from opting for the online channel, especially if all other competitive advantages over brick-and-mortar remain in place.

The real test will be whether or not brick-and-mortar merchants will be able to use the now-level playing field to their advantage or if the tax unfairness is just another excuse to explain rampant store closures and failing Main Streets.

What Do You Need to Do Next?

If you’re set up to collect sales taxes on your transactions right now, don’t panic. Deadlines have not yet been determined for your eCommerce store to become compliant. But that time will come soon, and it’s best you start preparing now.

Every online merchant should do their due diligence to ensure they’re following state sales tax collection laws. States now have the green light to examine their collection requirements and how to enforce them.

For South Dakota, the new tax requirements could take place within the next 30 to 90 days. Several other states, including North Dakota, are already hard at work as passing similar laws.

You can protect yourself by keeping your finger on the pulse and knowing when these laws go into effect. You might also invest in solutions like Avalara that can help you simplify the process.

The impact of not collecting sales tax for the past 15 years has cost an estimated $33 billion annually in lost tax revenue. It will be interesting to see how the new state laws will affect the economy and brick and mortar businesses in the short and long terms.

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