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How the Supreme Court’s State Tax Ruling Impacts You

President Trump tweeted his approval for a Supreme Court ruling last Thursday, saying it’s a “big victory for fairness and for our country. Great victory for consumers and retailers.”

Get ready, you are probably going to be paying a little bit more for that eBay purchase. If you run an online store, you might have just inherited a virtual state tax headache (no pun intended).
2018 State Sales Tax Ruling

What Just Happened?

In a decision with potentially enormous consequences, the Supreme Court in a close landmark decision, ruled 5-4 on Thursday (June 21,2018) to allow states to collect sales tax from online and out-of-state retailers, regardless if they have a physical presence in the state. In the majority opinion, Justice Anthony Kennedy, said that times have changed to such a degree that online retailers no longer qualify for “an arbitrary advantage over their competitors who collect state sales taxes” by claiming they don’t have a physical presence in a state which came from outdated rulings dating back to mail-order days.

The ruling allowing states to tax e-commerce providers outside their state borders will be almost guaranteed to create added headaches for companies handling online transactions, but the bright side is that it may help brick-and-mortar retail businesses.

Aren’t States Already Collecting Online Tax?

Currently, forty five states collect sales tax. The only states that don’t have sales tax are: Alaska, Delaware, Montana, New Hampshire, and Oregon. All other states have some sort of sales tax and the tax rate for each state can differ, even down to the county level.

This is what makes it hard for online merchants to track it by hand or even in a spreadsheet. Major e-commerce sites like Amazon have already been adding state sales tax into consumers’ purchases, and is equipped to deal with the complexity, while other smaller online merchants will have to adapt to the changes.

Who’s Impacted

In short, everyone. We are all going to be paying a little more for online purchases. With millions of American online sellers be impacted the most by this ruling, it’s going to take a while to measure the entire scope of this ruling.

There are well over 10,000 state, city and local sales-tax jurisdictions in the country, and the responsibility for figuring out how much tax to collect and where to send it ultimately will be the responsibility of the online sellers.

Online sellers are among a growing segment of Americans, who either supplement their income or rely on internet sales as their sole source of income. This is made possible from digital platforms such as Etsy, Shopify, eBay and even WordPress.

It’s still unclear on the specifics including if the state where the server is located that hosts the website will be able to get their share as well. These details will have to be sorted out and may prompt Congress to introduce new legislation for national standards around interstate commerce to avoid a patchwork of state sales tax laws that can be difficult for retailers (especially small businesses) to navigate. Many major online retailers are looking to Congress to clarify the ruling with a framework to defend small businesses and provide uniformity and consistency. We can expect an overhaul on unifying e-commerce for all 50 states. It’s going to take time, is not going to be fixed over night and it’s not going to be easy.

Follow the Money

In a 2017 federal report to Congress, it was estimated that state and local governments were missing out on $8 to $13 billion in tax revenue from online retailers. Retail e-commerce sales in the United States in 2016 was $322 billion. In 2017, online consumers pushed e-commerce sales to $452 billion, which was about 9% of all retail sales with the online giant Amazon reporting $54.5 billion in e-retail sales of physical goods in 2017.

The ruling overturns a prior 1992 court decision, Quill Corp vs. North Dakota, which established the “physical presence” standard for sales tax. Approximately 2% of Americans had internet access in 1992 compared to nearly 90% today. Those of us old enough will remember that in the early days of e-commerce, purchasers of items over the internet paid NO sales tax at all. Since the advent of the internet, the dynamics of retail industry have evolved and this is just another of those evolutions.

What Can I Do?

Don’t panic, there are a several software companies that are available if you plan on tracking it yourself. The three main software providers: TaxJar, Taxify, and Avalara. TaxJar is built for small to medium sized companies, and we have found it to be the better software for our e-commerce clients. Taxify and Avalara are built to support the larger companies and with that said, also have a larger price-tag to go with it.

If the thought of tracking your own sales tax is too daunting or you just don’t have the time to do so, we would recommend that you seek out an accounting firm that you feel the most comfortable with that specializes in sales tax (or give us a call at 888-620-0770).

Like all things in the e-commerce industry, sales tax laws will continue to evolve and it is important as an e-commerce entrepreneur to keep up to date on the new rulings and laws.

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