The world of digital business and eCommerce move quickly, and the rules of engagement are almost constantly in flux — so it comes as no surprise that a recent Supreme Court ruling signals big changes for online retailers in the US.
While it might be months before you see an impact on your own operations, the implications of the 5-4 ruling are definitely worthy of a closer look… especially if you’re growing an eCommerce or subscription-based business with no physical storefront.
Haven’t had a chance to read up on the recent SCOTUS decision? Here’s what happened in a nutshell…
For years, customers shopping online could count on their purchases being tax-free. For consumers, that meant saving a few extra dollars on every purchase — and made it even easier for digital retailers with no physical presence to stay competitive against physical stores.
This was all thanks to a 1992 Supreme Court ruling that determined retailers didn’t have to impose a sales tax if they had no physical presence or employees within a state’s borders. But late last month, the Supreme Court overturned the ruling in a case between South Dakota and Wayfair Inc., essentially setting the stage for other states to eventually require that online-only retailers charge state sales tax.
The biggest thing to remember at this point is that this ruling is, for the most part, limited. The ruling itself was specifically in regards to the state of South Dakota, which passed a law back in 2016 that required out-of-state sellers to collect sales tax as if they had a physical store somewhere in the state. This ruling held up that law despite Wayfair Inc. arguing that such a law was unconstitutional.
That said, the ruling does mean that other states could follow suit — which could have an impact on businesses operating exclusively online.
“State and local governments have really been dealing with a nightmare scenario for several years now. This [ruling] is going to allow state and local governments to improve their tax enforcement and to put local business on a more level playing field.”
– Carl Davis, Research Director at the Institute on Taxation and Economic Policy
So what does that mean for an eCommerce business like yours? It depends…
Plenty of tax experts have made it clear that the ruling certainly isn’t a “blank check” for states, so businesses that sell products online still have a bit of time to figure out how this impacts their customers and their bottom line.
The same goes for you and your business. If you have no physical storefront and operate exclusively online, it’s no time to panic. For the time being, these changes are limited only to companies that trigger something called an Economic Nexus — or, simply, when a remote retailer reaches a certain dollar amount or transaction threshold (in the case of South Dakota, that’s $100,000 or 200 separate transactions with customers that reside in that state).
Right now, there are 20 other states that have a similar nexus laws, but each of those states have different statutory start dates and transactions requirements. Simply put, you only need to worry about per-state sales taxes if you reach those nexus thresholds.
Depending on where your customers live, your may or may not trigger nexus — so make sure you do your research on where the majority of your customers live and the nexus laws in those states (if they have them). Since this ruling directly impacts sales in South Dakota, looking at your sales to customers in that state is a good place to start.
If you’re a tax geek or want to get into the nitty gritty details of how this ruling could affect your business, get more info and sign up for an upcoming webinar with our partners at Avalara. Their tax experts can answer your questions about what these changes mean for your eCommerce business.
What can you do to make sure you’re prepared for upcoming changes?
At LimeLight, we talk a lot about the importance of knowing your customers — and it’s that same knowledge that will keep you ahead of the curve for upcoming sales tax changes. Thankfully, sales tax in South Dakota (and likely for other states as well) won’t be retroactive. If you’re on top of your customer data and analytics now, you’ll save yourself plenty of time and stress in the long run.
Not sure if you have the right data at your disposal? If you haven’t already set up an eCommerce analytics routine, now is the time. It’s this kind of data that you’ll need to determine where and when you’re liable for sales tax, and what will ultimately put you in total control of not just your business, but the experience of your customers.
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