On Thursday, June 21 the United States Supreme Court handed down a ruling for South Dakota vs. Wayfair, inc. that will reshape the way many businesses collect payments for online orders. The court overturned the 1992 ruling for Quill Corp. v. North Dakota which declares that corporations without a substantial connection to a state (such as a physical location) cannot be charged sales tax for goods sold to residents of the state. This ruling ushered in an age of tax-free online sales.
The court voted 5-4 to overturn the ruling, noting that the inability to collect sales tax for online sales results in an annual loss of up to $33 billion per state. While the added revenue will be warmly welcomed by states, small businesses and entrepreneurs are likely to suffer from the new regulations. Faced with a new set of financial and legal hurdles to navigate, many businesses will have to rethink their approach to online sales and product availability.
Small businesses and innovators will be subject to over 12,000 taxing jurisdictions in the United States. They will face audits and compliance costs very few can comprehend. And many businesses will likely limit their reach or go out of business rather than face the risk of audit from states like California, Illinois, or New York. (Source: ALEC )
South Dakota recently enacted new legislation that requires all merchants to collect a 4.5% sales tax if they process more than $100,000 in annual sales or more than 200 transactions in the state. Under yesterday’s ruling, this legislation is now applicable to any online merchant, regardless of their physical location. While South Dakota is the only state with an enforceable tax law, we can expect a flurry of legislative proposals in states across the country in an effort to begin drawing from this new revenue stream as soon as possible.
What does this mean for my small businesses?
If you are selling and shipping goods, you must now pay much closer attention to the local tax regulations of each state to ensure that you are compliant with all requirements and submitting the proper payment. Failing to comply could result in numerous state tax audits and costly fees. Many accounting and tax-filing suites will assist with calculating your tax obligations in each state, but if you would like to take a proactive approach to avoid a volatile tax season you can engage with a Tax Compliance service.
Synico uses a completely free service called TaxCloud, which is funded directly by states to help small businesses keep on top of their sales taxes. It integrates directly with many popular eCommerce platforms to provide automated state registration, filing remittance, and audit response for sale tax in 24 states and counting. Within hours of the ruling, TaxCloud’s CEO issued a statement to all active users:
We always expected this day would come. We built the internet’s only free sales tax compliance service specifically anticipating this day. The most interesting aspect of today’s ruling, in our view, is that the remaining 21 states that have yet to certify TaxCloud, will likely do so in short order, allowing us to expand our footprint of completely free service to all states.
Until the United States Congress enacts legislation to protect small businesses, many small retailers will face a wave of new and undefined threats to their revenue and viability. While many details are left unknown, such as whether states can retroactively collect sales tax and which types of transactions do not warrant taxation, one thing is certain: entrepreneurs need to be hyper-aware of the changes enacted in each state and proactive in their compliance to keep their businesses out of legal trouble.