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What SCOTUS Ruling Means for eCommerce Clients

Jul 23rd 2018
CPA Catching Clouds
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Everyone in ecommerce knew that, at some point, there would have to be a tipping point. That point was reached in June when the US Supreme Court made their decision on the South Dakota vs. Wayfair case. So if you have ecommerce clients, now what?

In the past, some sellers defiantly assumed the risk of non-compliance; others began collecting and remitting sales tax in either a handful of the high risk states or even in all Amazon-occupied states as Amazon opened new warehouses.

Meanwhile, as online sales continued to cannibalize the brick-and-mortar sales, state governments’ sales tax revenue continued to tank. It was inevitable that one of the states would eventually get their case escalated to the US Supreme Court, and South Dakota was the lucky winner.

By overruling the Quill case, the US Supreme Court ruling throws the traditional definition of physical nexus completely out the window for state sales tax purposes. It no longer matters whether a company has ties to the state. States can tax them anyway.

If there are sales in that state, the state can create its own rules about who is subject to collecting and filing. Several states have already been dipping their toes into the concept of “economic nexus” by forcing companies to file based on dollars sold and/or number of sales in that state.

In short, the ruling in South Dakota v. Wayfair just made economic nexus a-okay. And to add insult to injury, if it’s not the company’s home state, the states doing the taxing don’t care much about the opinions of the companies being taxed when establishing the rules (you know, taxation without representation and all that).

Does it Level the Playing Field?  

There are 45 states (plus DC) that have state sales tax laws. Every state is going to want to increase their revenue by following the precedent set by the US Supreme Court, so they’re going to start acting to do that as soon as possible.

I think what many people don’t realize is that the online sellers of today ARE this millennium’s mom and pop shops. The vast majority of online sellers are small with razor thin margins.

Many don’t have any employees at all and make very little profit. And yet, states are fighting to have them collect and remit sales tax to make it “fair” to the local brick and mortar businesses.

Imagine you and your spouse open up an online store and begin selling widgets for a tidy profit. Maybe you’re successful enough to be able to rely on profit of about $75,000 per year which is more than the average household income.

Now you learn that you may need to collect and file sales tax in 45 states. There is no way you’re going to be able to learn about the different rules in each and every state AND collect sales tax properly on all your shopping carts AND prepare sales tax filings every month, quarter, and/or year (and keep track of which is which). It would become your full time job.

So let’s assume you can find a way to do it for only $50/mo per state. 45 x $50 = $2,250 per mo x 12 months = $27,000 per year. That mom and pop shop just slashed their profit from $75,000 to $48,000 per year.

It will be up to the US Congress to pass laws to protect these small businesses, but with a 17 percent overall approval rating… yeah, there is low confidence that that’s going to happen.

Good News/Bad News for Sellers

With all of the above said, the state leading the charge here (South Dakota) does not require sellers to collect sales tax until they make $100,000 in sales in South Dakota OR sell 200 transactions in South Dakota. The good news is that with such a low population in South Dakota, it’s actually pretty difficult to meet this threshold. In fact, an online retailer with an average order amount of $25 would need to have about $1.8 million in total company sales to meet that $100,000 threshold. And their state it not alone.

The bad news is that as a business owner, it’s now your responsibility to keep track of the ever-changing state sales tax laws in every single state to make sure you are adhering to all the rules.

What Does This Mean for Consumers?

The days of buying items on the internet because you “don’t have to pay sales tax” are pretty much over. It won’t happen overnight, but we’re definitely moving in that direction.

I don’t personally think many people will be so upset about it that won’t buy online. Honestly, their alternative is to go to a brick and mortar store which will absolutely be charging sales tax. So, I don’t see consumers as the ones being directly harmed in this way. Plus, consumers’ communities will presumably be improved with the new revenue being taken into their states.

However, I do suspect that the online “mom and pop” stores that are now deciding that the cost of compliance is too great to stay in the business will lead to less competition in the marketplace and/or the costs of compliance will be passed along to the consumers in the form of increased prices. So this is the greater concern for consumers, in my opinion.

Replies (3)

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By Npoplowitz
Jul 23rd 2018 12:15 EDT

For states that don't impose an income tax (which, in and of itself, makes no fiscal/economic sense), it is in my opinion a requirement to impose both a sales tax and a property tax so that the business or home owners populations (of that state) can subsidize what that state and its municipalities requires in order for that state and those counties and cities to function and to be adequately funded.

I know that this way of thinking runs contrary to the Republican mind set, but the imposition of a system of taxation is fundamental to a democracy. Without a way to pay for the repairs of roads, bridges, police, fire and other essential services, we simply could not exist.

What happened in Kansas and Louisiana when those idiotic Republican governors decided to eliminate their income tax? The answer I think is rather obvious: Those states almost collapsed, economically speaking.

If you, as a condominium owner, decided not to pay your periodic assessments, or any special assessment, and if there were no funds available, the operation of your property would be at risk.

Sales taxes should be imposed on all sales that are derived from a person or a business that is located in a particular state, and this should automatically include both brick and mortar stores as well as online businesses. Period.

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Replying to Npoplowitz:
By PScharfCPA
Jul 23rd 2018 23:03 EDT

I understand what you're saying, and I even agree with you... in theory.

The problem is that the cost to small online retailers while they attempt to comply with all the ever-changing rules in dozens upon dozens of states is obscene. In many cases, the cost of compliance can literally wipe out all of the profits of a small ecommerce business.

Your argument is valid... states need income to provide necessary services to its citizens. But the way the government is currently going about it is harming small online business. Period.

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By Slimpicks
Jul 23rd 2018 15:58 EDT

This is a business opportunity for you CPA's in private practice. Offer a service to your online selling clients to perform the task for them. Each month they send you a report of their sales by state (easy to calculate on Quick Books or other software), you tell them how much is owed and where to send the $$$. Should be easy to create a program where you load the tax rates and calculate the amount due. This could all be automated and then you bill them a reasonable fee.
Larry Cosgrove, CPA retired.

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