By Ian McCue, senior associate content manager at NetSuite(opens in new tab)
- The Supreme Court ruled Thursday(opens in new tab) that a state can charge taxes to ecommerce companies, even if they don’t have a physical presence in that state.
- At the very least, most states are expected to start charging taxes to large online retailers in the wake of this decision.
- There are plenty of tax compliance solutions available for small businesses to automate the endless complexities of taxes.
Many owners of small online businesses woke up to disappointing news on Thursday morning.
In a much-anticipated decision, the Supreme Court upheld a South Dakota law(opens in new tab) that allows the state to gather sales tax from online businesses that have at least $100,000 in sales from state residents or 200 transactions with state residents annually. This overturned a ruling from 1992, Quill Corp. v. North Dakota, which prevented states from collecting taxes from companies who don't have a physical presence in their state.
The close 5-4 decision is meant to level the playing field between online sellers(opens in new tab) and traditional brick-and-mortar retailers. In the coming months and years, states will likely change their ecommerce tax laws(opens in new tab) based on this decision. Ecommerce sales added up to $450 billion in 2017, making up 13 percent(opens in new tab) of all U.S. retail sales. Forty-five states have some kind of sales tax(opens in new tab), and online sales represent billions of dollars in taxes every year, per NPR. Some states already have workaround laws to collect sales tax online, but experts predict they'll scrap those in favor of legislation modeled after South Dakota's(opens in new tab).
The Supreme Court's ruling closes a loophole for online retailers.
It seemed only a matter of time before the government shut down this workaround. The 1992 ruling gave certain online retailers a competitive advantage: with it, they could not only attract more customers but also avoid calculating or remitting taxes on out-of-state orders.
However, Chief Justice John Roberts was not in favor of the ruling(opens in new tab), expressing concern that the decision will slow the growth of ecommerce.
“Ecommerce has grown into a significant and vibrant part(opens in new tab) of our national economy against the backdrop of established rules, including the physical-presence rule,” Roberts wrote in the dissenting opinion. “Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”
But never fear: Cost-friendly softwares can get you in compliance with the new rule.
Smaller ecommerce companies may not have a scalable way to calculate local taxes and transfer those payments to the appropriate authorities. But this is not a problem without a solution. In a friend-of-the-court brief(opens in new tab) filed last year as part of this case, the National Retail Federation (NRF) pointed to the widespread availability of software to automate taxes(opens in new tab). These applications can calculate, collect and remit sales taxes, and thousands of online retailers already use them(opens in new tab).
This software will soon be mandatory for ecommerce companies of all sizes. It’s the only way to navigate the complications of dealing with sales taxes in 7,000-plus state and local jurisdictions.
The good news is many of these applications are affordable and priced by the number of transactions you process every month, so they can fit your budget. Avalara(opens in new tab), TaxJar(opens in new tab), Taxify(opens in new tab) and TaxCloud(opens in new tab) are a few popular vendors for tax compliance software.
In this case, smaller businesses have an advantage over large ones.
We hear you: These taxes are yet another burden for business owners to worry about. However, there's time to get everything in order before tax laws for ecommerce change at the local or national level. Smaller businesses have an advantage, as this is a much more feasible project for them than it will be for online retail behemoths.
Right now, a smart first step is evaluating and purchasing a tax solution that has the functionality you need, at the right price point. Don’t worry too much about this news -- once you get a tax application up and running, your ecommerce company will be fully compliant and ready to keep growing.
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