Last Thursday, the US Supreme Court ruled that all states and local governments are now allowed to require online retailers to collect sales taxes even if they do not have a physical presence, or nexus, in the state, relying instead on having an ‘economic presence’. This landmark decision overruled Quill Corp. v. North Dakota, which had ruled that a catalog retailer could not collect sales tax in North Dakota because it had no physical presence in the state.
So what does this ruling mean for today’s eCommerce retailers? Here’s what we know:
This will affect different online retailers in different ways. Online-only sellers will likely feel the shock most, as they’ve likely been charging state tax in few locations and have not had to comply with the over 12,000 tax jurisdictions or integrate with costly tax software. Conversely, large retailers with many brick-and-mortar stores may be at an advantage with this new ruling, as most physical stores will have already had to charge state and local taxes. Midsize retailers with both online and brick-and-mortar footprints may be just as challenged as online only sellers if they only have presence in a few states. For all but the biggest, this will now be an increased reporting and accounting burden on them to meet this demand, and the smaller the online seller, the less likely they are to be equipped to handle these new regulations. Many believe this ruling will allow for a “fair and level playing field,” as Matthew Shay, president and CEO of the National Retail Federation put it. Retailers will now all operate under the same sales tax rules, whether they sell merchandise exclusively online, in stores, or both. Will retail competition become stiffer once this decision starts to play out? Will this be too large of a burden on smaller etailers or midsize cross-channel sellers? Time will tell.
With this decision, there will be new rules and legalities for retailers to navigate, and they will be changing a lot in the near term. This decision means that states can require retailers to charge and remit state tax, but currently not all do. North Dakota was not the only state with this precedent; there are about 16 other states with similar laws that could allow them to require tax collection on internet retailers. Other states will likely revise their tax laws as well to align with the ruling or create new ones to start requiring collection and remittance from online retailers, creating a dynamic patchwork of state-level requirements. Within each state the tax requirement can vary even more. For instance, the categories that items are taxed as in different states may vary, and retailers will need to know those differences to remain compliant. Third party tax providers will also be experiencing a boom in business as many small and midsize businesses will need support navigating these new regulations.
This isn’t a new tax. Consumers actually owed these taxes all along…they just weren’t paying them. Before this decision, consumers were responsible by law for remitting the tax they owed the state for their purchases if the store did not collect it, a regulation few consumers actually knew. Now the retailers that have no physical presence can be required by state law to collect and remit, if they have an economic presence in the state. This may be an important point for retailers to communicate to their customers via FAQ, targeted emails campaigns, or inline checkout help content. Customers who are used to not being charged tax and suddenly start seeing tax appearing on their cart could drive call center calls or increased abandoned cart rates. Getting ahead of these potential challenges by proactively communicating with customers impacted by these regulatory changes could end up having a direct impact on your net bottom line.
eCommerce is a constantly changing space, and retailers need to adapt to stay competitive. If you are not currently working with a trusted eCommerce partner that provides technical expertise and ongoing support and training, your business could be a casualty of these changes. Schedule an appointment with Virid to see how our team of eCommerce experts can help you: