Wayfair: A New World for Online Sellers
Over the summer, the Supreme Court issued its decision in the pivotal case of South Dakota v. Wayfair, Inc. It will take some time to see the full effects, but for now it appears e-commerce may have taken hit as states prepare to move in and collect sales tax from online retailers.
Before Wayfair, the law stated that a state could not require an out-of-state seller with no physical presence (no office or employees) in the state to collect sales tax on goods shipped to the state. Instead, the burden was on the purchaser to report use tax when necessary. Due to this, most online retailers did not collect sales tax on purchases made through their websites. It is estimated this policy caused the states to lose between $8 and $33 billion every year.
However, in Wayfair the Supreme Court ruled in favor of South Dakota and reversed prior decisions that had led to these laws. The decision stated that sales alone are enough to create a connection to the state. Now, online sellers are required to collect sales tax if their sales in South Dakota exceed $100,000 in goods and services or they have at least 200 or more separate transactions. The Supreme Court reasoned that previous court decisions were concerned that a small company with one salesperson in multiple states might be equally or more burdened by compliance costs than a large remote seller with 500 salespeople in one central location. However, this led to an increased share of the taxes to those consumers who buy from competitors with a physical presence in the state. This ruling is the courts attempt to bring the law closer to the economic reality by putting market participants on an even playing field regardless of physical presence.
Several states began passing economic nexus laws like South Dakota before Wayfair. After the official ruling, more states are following. The problem? There is no agreement as to threshold amounts or when the law will become effective between the states. States like Alabama, Michigan and Illinois had an effective date of October 1, 2018. Texas will not enforce its law until late 2019 and will not be retroactive, in order to give its vendors sufficient time to comply with the law. While other states, like California, do not have a target date and are still in the process of providing guidance as to how to apply the new court ruling.
What does this mean for online vendors? Well, it depends. Some companies, like Amazon, voluntarily collect sales tax in every state so there will not be a change there. For companies like Wayfair, Overstock.com and Newegg, we are likely not to see an increase in pricing since they are big enough to handle the change. Small online vendors will likely increase their prices as they find ways to become compliant in every state, or until someone develops software to make compliance easier. In any case, online vendors will now have to take another look at their sales tax obligations.