Town halls and legislatures are celebrating the U.S. Supreme Court’s decision to allow governments to require out-of-state online retailers and remote sellers to collect sales tax from their customers.
Effectively, billions in previously uncollected sales tax dollars will begin flowing into state and local budgets, but not everyone will be too pleased with the High Court’s ruling in South Dakota v. Wayfair Inc.
So who is popping champagne corks?
1. Old-School Brick and Mortar Shops
Up and down Main Street, mom and pop retailers are smiling a little broader. The SCOTUS decision theoretically levels the playing field for all retailers, especially locals with no internet presence who’ve watched their business fall. Their sales may go up if they see less “show-rooming,” where shoppers walk in to touch and feel a product only to leave and buy it online. (Caveat: Shoppers may still opt for convenience and selection over price, as Amazon had already been collecting sales tax.)
2. Green Eyeshade Brigade (CPAs & Tax Professionals)
Bring on the state and local tax accountants! Online retailers, remote sellers, and foreign entities shipping into the U.S. will have to comply with myriad state tax laws to continue to do business in interstate and foreign commerce. The SCOTUS decision allows states to enforce a bunch of arcane tax rules that businesses will need accountants’ help to figure out.
3. Fintech Startups
All retailers, big and large or the accountants they use, will look to software vendors to efficiently solve the increased state and local tax complexity. Look for new or enhanced offerings from specialized tax-automation companies like LumaTax and Avalara as well as e-commerce marketplaces like Amazon.
4. Contingents of Consultants
Some retailers will look beyond accountants to specialized consultants and technologists—like PricewaterhouseCoopers, Deloitte—to advise them on complying with the complex rules.
Who’s crying in their beer?
1. Small E-commerce Retailers
The long tax holiday for Overstock, Wayfair, large e-commerce retailers, and other remote sellers was great for them while it lasted. Now, they have to collect taxes like everyone else. That effectively raises their prices, which in turn could eliminate their low-cost advantage and reduce sales revenue. They’re also about to get hit with increased legal exposure from the complexity of conforming to new tax laws.
2. Small Online Businesses
Small online sellers will see added costs for things like managing collection and remittance. Compliance will require specialized software subscriptions, accountant fees, and administrative expenses associated with communicating with state taxing authorities to create 45 state tax IDs. For that matter, any business that collects sales tax could take a hit. With a new jurisdiction of taxes, there’s a new area of risk with a likely rise in sales-and-use tax audits.
3. Individual Taxpayers
The Justice’s decision opens the door to harsher income tax rules. How? Physical nexus (when companies are required to collect and pay tax on sales in any state in which they do business) will no longer be the determining factor for imposing taxes. If that’s the case, it’s likely that some states will “export” income tax to steal a little appeal from no-income tax states like Florida, Texas, and Washington.
With such sweeping changes afoot, it’ll probably take months for the taxing authorities to figure out how to react to the Court’s decision. Many states had already enacted “economic” nexus laws similar to South Dakota and will start enforcing them immediately.
Other states will begin the process of creating and implementing their own laws to capitalize on the decision. We may also see federal legislation on the matter turn into law.
Most consumers won’t see the tax added to their purchase for several months. But when that happens, will shoppers’ habits change? Will the slump in physical retail disappear? Will the added compliance burden have a meaningful impact on Main Street businesses?
It’s hard to tell what the unintended consequences will be. But city and state tax collectors have dollar signs in their eyes over the Court decision’s intended consequences.