Last modified: February 20, 2019
Last June, the U.S. Supreme Court ruled to overturn what many considered an outdated provision in state sales tax laws. The South Dakota v. Wayfair ruling means that states can now require out-of-state retailers to charge sales tax on online purchases, regardless of where the company has a physical presence. The majority opinion, written by Justice Anthony Kennedy, overturned what some considered an unfair advantage for companies selling online versus in brick and mortar stores. This ruling has massive implications for fledgling consumer electronic businesses selling online and creates a compliance burden for out-of-state ecommerce companies. Brands selling online must take proper measures to insulate themselves or face additional scrutiny from tax auditors and other potential repercussions.
The Facts: What You Need to Know About the Ruling
With this ruling, states can now go through and reassert their nexus standards either by enforcing previously passed laws or passing new ones as their legislative sessions resume. This decision removes the previous nexus assertions that focused on companies’ physical location when determining sales tax requirements, and grants states the ability to enforce out-of-state ecommerce retailers to collect sales tax. While approximately thirteen states have current laws on the books that will allow them to start collecting this new tax revenue very shortly, most have to enact new laws before collecting the tax, so it will take some time before the full impact of this law is realized. With many states in need of financial resources to help fund local projects, it is likely all states will adopt some level of this new sales tax standard, which will require out-of-state sellers to register and administer it correctly. However, due to the level of uncertainty, the situation remains fluid, and requires close monitoring by all organizations, big or small, who sell online.
This ruling also goes beyond our shores – just as any company that does business with European residents needs to comply with the General Data Protection Regulation (GDPR), regardless of geographic location, these changes to U.S. sales tax laws apply to companies all over the world. If a company sells to U.S. customers, they need to review the applicability of these new tax laws. This is just another step in the nuances associated with maintaining tax and regulatory compliance around the globe, causing massive headaches for brands.
Additionally, there are discussions pertaining to a streamlined sales tax initiative within the U.S. that will create simplified reporting for management and processing of tax laws, similar to what’s been adopted in the European Union. These discussions are ongoing, but due to differences between states, it’s been difficult to gain widespread support. In this increasingly nuanced tax environment, the one thing that’s certain for global ecommerce businesses is that ensuring tax compliance is increasingly complex and ever-changing.
Get Familiar Fast: Steps to Ensure Compliance
Businesses need to closely examine and retrofit their ecommerce operations to determine in which states they must collect tax, whether their goods are taxable, and how they are going to handle the new tax computations, filing and remittance obligations. Companies need to be familiar with tax laws in every state in which they sell – and quickly. Nearly half of all states already have processes in place to finalize their new tax laws and start collecting, with many expecting to be up and running later this year.
Small and medium sized businesses working to grow their direct-to-consumer channels will need to put new teams in place to maintain compliance and be prepared to respond in the case of an audit. Furthermore, businesses of this size often lack the staff to follow rules across the more than 14,000 U.S. tax jurisdictions. The combined reporting and collection of tax, while also being forced to monitor activities across 50 states, will require a lot of time and additional resources not to mention substantial risk.
Don’t Get Taxed: Leverage a Third-Party
For businesses, finding a partner to help navigate this new compliance burden may be a way forward rather than assembling a vast back room operation. To alleviate the time and resources for brands, third-party resellers can handle the complexities of interstate and global online commerce, including global regulatory compliance and taxes. In this case, the reseller serves as both merchant and seller of record, protecting the business from these new compliance burdens so they can focus on the parts of their business they know best. In this case, the business will be insulated from having to expose its filing history or registering with states in which updated nexus standards are applicable.
For competing brands, particularly within consumer electronics where small nuances can mean the difference of a sale or abandonment to a competitor, customer experience is key. Internal IT departments must be sharp in how they integrate these updated tax laws into the shopping experience – data shows that a third of shoppers will abandon a site if they have to wait five seconds for a page to load. In contrast, relying on a third-party that already has IT systems in place and experience in tax minutiae to ensure a consistent, seamless customer experience without added latency, could be the tipping point for a shopper to complete a sale and for building long-term customer loyalty.
Compliance and tax regulations were already complex – this ruling by the U.S. Supreme Court adds to that burden, particularly for small and medium sized businesses selling to out-of-state shoppers. With limited budgets and resources to handle the complexity of new state laws coming to the forefront, businesses may require a partner that has the insights and experience to help them understand and implement these tax laws. A third-party can take on the transactional liabilities and shift the financial risks typically encountered from banks and credit cards away from these consumer electronic entities, freeing up the business to focus on the goods and services they provide rather than monitoring every state’s tax laws. For businesses who don’t take any action, either by building up their IT staff or relying on a third-party, they are putting themselves at risk of being non-compliant, and as a result, put their future profitability in jeopardy.
Contact us to learn how Digital River can help your brand manage the complexities of state-to-state and global ecommerce. Regulatory compliance and tax management around the world is what we do best.