Last Thursday, the U.S. Supreme Court overturned a 1992 ruling that allowed online retailers to skirt sales tax collection responsibilities in states where they did not have a physical presence. The decision, in South Dakota v. Wayfair Inc., states that internet retailers can now be required to collect state sales tax in online transactions.
With the new ruling, the businesses most will likely to be hurt are the millions of small-business owners who sell on marketplaces such as Amazon and eBay. The new decision means that those millions of small businesses may now need to collect and remit sales taxes in the 45 states that have them. That could be an expensive and time-consuming task, especially if new rules differ between states.
“Trying to follow all the thousands of laws of tax jurisdictions across the country would put us out of business,” said Cyndi Zlotow, who sells about $250,000 annually of apparel and other goods on eBay, Amazon and Etsy from near Chicago. “That is all I would do all day.”
The court disagreed that the new ruling would unfairly affect small- and mid-sized business owners. Justice Anthony Kennedy, writing of the majority opinion, remarked that “there is nothing unfair about requiring companies…to bear an equal share of the burden of tax collection.”
The old rule—established by the court in Quill Corporation v. North Dakota—enabled online commerce to boom and helped drive an explosion of small businesses. The Quill decision helped pave the way for the growth of online retail by letting companies sell nationwide without navigating the complex patchwork of state and local tax codes.
House Judiciary Committee members called Thursday’s ruling a “nightmare” for American businesses and said small online sellers would be subject to audits by “over 10,000 taxing jurisdictions across the U.S. in which they have no say at the ballot box or representation in state and local government.” They added that the ruling will hurt efforts to keep compliance burdens to a minimum for small businesses. “Today’s decision will stifle online commerce, close businesses and ultimately harm consumers.”
The new ruling will have a smaller effect on big brick-and-mortar chains like Walmart and Target, which have so many stores they already are collecting and remitting sales taxes on many online purchases. And Amazon, the largest U.S. online retailer, as of last year already collects sales tax on products it sells directly in every state that has one. However, the ruling could affect a range of online retailers like Overstock.com and Wayfair because internet-only retailers have had to collect and remit sales tax only if they had a warehouse, corporate office or other physical presence in that state.
What of Small Business Owners?
The court’s decision could have a chilling effect on the millions of small independently owned businesses—which have fewer resources—that sell online. Those businesses largely rely on marketplaces like Amazon and eBay, which don’t collect sales tax for most of these merchants. The ruling didn’t change that.
Amazon recently said that wares are sold on its marketplace by more than one million small businesses, defined as having less than $7.5 million in annual revenue based on a U.S. Small Business Administration guideline. And eBay says it has six million U.S. sellers, while online crafts marketplace Etsy claims some two million sellers worldwide.
It isn’t exactly clear how new state laws might take shape, and what type of burden they may place on sellers. South Dakota’s law—which was the one presented before the high court—allows exemptions for small businesses that had fewer than 200 transactions or $100,000 in sales in the state. The court flagged that was one of the reasons for its decision.
Some states could follow Washington, Pennsylvania, Oklahoma and Alabama, all of which have passed legislation to mandate that marketplaces collect taxes on behalf of their sellers. Meanwhile, Amazon, eBay and Etsy have been pushing Congress to pass a bill that would standardize the rules across states. Both Etsy and eBay reiterated Thursday they would continue to push for that solution.
How will the new ruling affect direct selling companies? MLM Attorney Kevin Thompson of Thompson Burton PLLC, believes the Supreme Court decision is a positive for the channel.
“The vast majority of our clients are already collecting and remitting sales taxes,” said Thompson. “We have always assumed that state jurisdiction is triggered when there are salespeople present, regardless if the home office is located in the state. I believe the decision will put pressure on third-party sellers to get into compliance, which will be extremely difficult. It will make the direct selling channel more attractive for those sellers because the majority of companies in our industry automate the sales tax function.”
To read the Supreme Court decision, click here.