As old tax laws and court rulings struggle to catch up to e-commerce, some of the nice loopholes that benefitted online retailers are closing fast. One in particular -- that allowed retailers to avoid charging a state's sales tax if they didn't maintain a physical presence in that state -- was shut tight by the Supreme Court this week.
In a 5-4 decision, the Court admitted previous rulings on the issue of internet sales tax were "flawed," and can "create, rather than resolve market distortions." So, what does this reversal mean for your small business?
An Extraordinary Imposition
Quite a few states, South Dakota among them, don't levy income taxes on their residents, and make up for that loss of funds through sales tax. But, with so many people doing their shopping online, state budgets have been dwindling. And giving out-of-state retailers a free pass on taxes gave them "judicially-created tax shelter," according to Justice Anthony Kennedy. He also argued previous rulings put local businesses at a "competitive disadvantage" and were "an extraordinary imposition by the judiciary on the states' authority to collect taxes and perform critical public functions."
With that imposition removed, the Supreme Court paved the way for states to start charging sales tax on purchases their residents make. This means that if you're selling goods on the internet, you may be responsible for remitting that tax to the state, though you can likely pass the cost on to your customers. Some smaller retailers -- in South Dakota the threshold is over $100,000 in in-state sales or more than 200 transactions to state residents -- may not be required to collect and remit the tax. (Although you may want to advise your customers that, in that case, they will be responsible for paying sales or use tax on the purchase.)
A Great Day for Main Street?
While some are claiming this will be a boon to local brick-and-mortar business -- "It's a great day for South Dakota and Main Street America," South Dakota Attorney General Marty Jackley said, adding, "It's going to revive Main Street South Dakota and Main Street America" -- others contend it's a big win for big online retailers like Amazon.
As Eugene Kim pointed out on CNBC: "Since Amazon already collects sales tax in every state on the products it sells directly, which account for roughly half of all units sold on its site, the court ruling should have less impact on how much it charges for its products." The customers of smaller online retailers, on the other hand, may be faced with some sticker shock once the new tax provisions are rolled out.
To make sure you're in compliance with state tax laws for online sales, talk to a tax attorney today.