New developments in online commerce
Mariam Furmanau | Personally, I dislike sales tax. It makes a bargain so much less than a bargain. It makes high-ticket items into very high-ticket items. It is confusing. It differs by product and then by state, province, region and county, often very unexpectedly. It is somehow included on my tax return but I am not really sure how.
But I really hate sales tax as an e-commerce vendor. For a consumer it is merely a nuisance to have to pay sales tax at the checkout. Grudgingly, unwillingly I pay. But as a vendor I have so much more liability: I have to make sure that 1) the items are set up with a correct sales tax rate; 2) I indeed collect the said sales tax; 3) I save collected money to be paid to the correct sales tax authority when the time comes; 4) I pay the said sales tax authority on time and in full, addressing any over or under payments; and 5) I keep the sales tax records for at least 5 years, in case of a potential audit.
But while points 3 and 5 are easily said and done, the rest is fairly involved and complex. And it has just gotten more complex, thanks to the state of South Dakota and the US Supreme Court.
Until Thursday, June 21, 2018, a company was required to collect sales tax on orders only made in or shipped to the states where a it had a nexus (a substantial connection to the state, most frequently a warehouse, office and/or employees on payroll). This means that as a NY-based vendor I was not required to collect and file sales tax on any orders shipping to, let’s say, South Dakota. The burden of paying this tax fell on the customer, who was required to pay a “use tax” on purchases from outside the state, but who rarely did so and was not punished for this negligence.
This law, ironically borne of yet another Supreme Court decision in the case of Quill Corporation v. North Dakota, was established in 1992 when the entirety of internet commerce comprised a mere $180 billion per year and online retail was but a fledgling business sector in need of as much support as possible. Now Amazon, who benefited greatly from that ruling in the 90’s, alone posts this level of revenue in a year. In the last 15 some years the landscape of e-commerce has changed dramatically; today’s online retail start-ups can only dream of the kind of a leg-up that Amazon got in the form of Quill v. ND.
Predictably, state governments and the Supreme Court also noticed the change in the online marketplace and its not so surreptitious bypassing of the states’ treasuries. So in a manner that works best in the world of commerce, via litigation, the matter of sales tax on online purchases again went all the way to the Supreme Court. And the latter obliged: in the case of South Dakota v. Wayfair, the Supreme Court effectively overturned its own 1992 decision and ruled that internet retailers can be required to collect sales taxes even in states where they have no nexus. Cue in a collective groan from every e-commerce vendor out there in America.
To see whether I should be turning my online store into, let’s say, a dry-cleaning business, I should consider what this ruling really means for the e-commerce vendors like me in this day and age. Well, in very simple terms, now I have to collect (and consequently remit) sales tax on applicable orders, regardless of where I am shipping them. The sales tax varies by product sold and by order destination (not origin), thus greatly complicating running an e-commerce business in a country with upward from 1,600 different sales tax rules that have a tendency to change frequently.
The good news, or perhaps, the bad, is that the Supreme Court only made it possible for the states to require sales tax to be paid on orders being shipped in from outside the state borders. The states still have to actually pass the laws requiring this. It has been a little more than a month since the Supreme Court decision and only a handful of states, the Dakotas leading the pack, have done so. In part, this slowness to act is because it’s summer, i.e. vacation time, but also because the complexity in the sales tax laws is a double-edged sword. It affects not only those following it but also those enforcing it. For example, municipal governments, like Pennsylvania or New Mexico, are prevented by their own tax codes from taxing orders coming from outside their borders and thus cannot benefit from this new ruling.
One of the arguments against SD v. Wayfair is that it creates a huge hurdle for businesses in terms of sales tax compliance. The proponents argue that in 2018 this problem is easily mitigated by technology. In part it’s true, there are already companies like Lumatax, Avalara, or Fast Sales Tax that help with some procedural elements of levying, collecting and reporting sales tax. Lumatax integrates with Square to offer help with sales tax filing, Avalara and Fast Sales Tax help with figuring out the sales tax due and then remitting it. Every e-commerce platform, like Shopify, also provides a sales tax plug-in that maintains updated tax tables, making tax levying an integrated part of checkout process. Unfortunately, there are no apps or systems out there yet, not in the mainstream at least, that take care of the entire sales tax process. It is still my responsibility as a business owner to figure out what would work best for my particular setup.
So should I sell e-commerce company and go into dry-cleaning? Not just yet. My plan is to do the following:
1. Reach out to my accountant and get more information on which new state sales tax regulations affect my business immediately and whether I am given a grace period to comply.
2. Research my existing e-commerce platform for options that would help me apply and maintain correct sales tax rates and run sales tax reports.
3. Find the most compatible and affordable sales tax automation solution that would help with filing of the sales tax, which includes registering to do so with every new state.
4. Keep an eye out for new tech developments, and the best place to start the search is within the app library for my current e-commerce platform.
The wonderful thing about American commerce is that it is so resilient and resourceful. Amazon, Wayfair, Walmart and the like have already been in partial compliance with SD v. Wayfair due to the Streamlined Sales Tax Agreement (SSTA). SSTA was created in 2005 by a coalition of 24 states that hope to streamline the sales tax rules in order to make compliance easier. It also allowed companies to collect sales tax outside of their nexus state(s) even before the SD v. Wayfair took place. So while newer, smaller businesses can no longer get the same preferential treatment that Amazon et al got in 1992, they can definitely benefit from the innovations that follow. And judging by the speed of adaptation and innovation the wait should not be long.
* Illustration by Dannae Alvarez