Sales tax collection just became more complicated for online retailers. In a case a University of Notre Dame tax expert called “one of the most important in this millennium,” the US Supreme Court closed a loophole that enabled some internet businesses to sell goods and services tax-free.
In a landmark 5-4 ruling June 21, the court overturned a 1992 Supreme Court case that helped fuel the rapid growth of internet sales. That ruling, Quill Corporation v. North Dakota, barred states from requiring businesses without a physical presence to collect sales taxes unless they
It clears the way for states to collect sales taxes on all ecommerce sales, just as with brick-and-mortar businesses. And while the ruling “is not a blank check for states,” it upends longstanding internet tax practices.
More expansive sales tax collection is a potential reality. And that makes use of the right ecommerce platform more important than ever, Arke marketing technologists said today.
The State of State Sales Tax
The decision in South Dakota v. Wayfair Inc. equalizes tax collection across digital and physical channels.
It eliminates what some traditional retailers have long viewed as an unfair advantage. And It’s a win for states that claim they have been losing from $13 billion to $23 billion a year in potential online sales tax revenue.
According to the latest data from the Census Bureau of the US Dept. of Commerce ecommerce sales account for about 9.3 percent of total US retail sales.
Forty-five states, the District of Columbia, and Puerto Rico impose general sales taxes. Alaska, Delaware, Montana, New Hampshire, and Oregon are the exceptions, although some do allow local, excise, meal, or lodging taxes.
Under the 1992 ruling, retailers without a physical presence in a state were not obligated to collect sales taxes. To address these “remote sellers,” 31 states adopted state laws to collect sales tax on internet sales.
South Dakota v. Wayfair Inc. examined the legality of South Dakota’s tax regulation. It imposed tax collection on sales made in South Dakota, even on businesses without a physical presence in the state.
Buyers Still Owe Sales Tax
In theory, customers are responsible for paying their own state sales tax, if any, on tax-free out-of-state purchases.
But Jim Seida, associate professor of accountancy at Notre Dame’s Mendoza College of Business, said there is very low compliance. That’s why the Wayfair case is so significant — in his words, “one of the most important in this millennium.”
He said it will have a huge impact on retailers, consumers, and state tax collections.
Leveling Sales Tax Collection
Anjanette “Angie” Raymond, an associate professor of business law and ethics at Indiana University’s Kelley School of Business, noted that large sellers like Amazon already collect taxes in the majority of the states.
And while some states have crafted laws to tax remote sellers, “much of the population lives in states without remote sellers’ taxation. Thus, sellers and consumers should expect changes in the tax in their online sales environment,” she said. “It is now in the hands of Congress to react to the ruling, should there be a desire to reduce the overlapping tax regimes that the online sales environment now faces.”
The ruling applies to all sellers, including small businesses. Individual states or Congress could decide to exempt small businesses, such as sellers on Etsy who sell less than $10,000 a year. But “time will tell” if this compromise is possible, she added.
“For now, states have secured the outcome they desired and brick and mortar stores have a more level playing field,” she said.
The Confusing Sales Tax Labyrinth
The new ruling could help in-state retailers with limited out-of-state sales. Remote sellers will no longer have a pricing advantage and all sales will be subject to the same sales tax rate, Seida said.
However, there are challenges ahead for small- to mid-sized remote ecommerce sellers. According to October 2017 data from tax software company Vertex, there are now at least 10,814 sales tax jurisdictions in the United States, up more than 800 since more than 800 since 2014.
Nationwide in the past 10 years, Vertex reports a complex web of sales and use tax changes. They include:
- 2,203 new sales and use taxes, an average of 220 per year
- 3,889 sales and use tax changes, an average of 388 per year
- 6,092 new and changed sales and use tax rates, an average of 609 per year
Sales Tax Rates Vary Widely
“Many e-retailers argue that ensuring that the correct sales tax is collected and remitted to the various jurisdictions imposes high compliance costs and an undue burden on the business. The magnitude of these compliance costs is a key consideration in the case,” Seida said.
Collecting sales tax isn’t as simple as it sounds.
Sales taxes are especially complicated in New York State. There are homes and businesses in thousands of cities, towns, villages, and other geopolitical or geographical subdivisions the US Postal Service recognizes as deliverable addresses.
In every case, there’s a zip code associated with the locality. However, zip codes may overlap locations having different sales tax rates, or simply assigned by the Postal Service to communities too small to have their own post office.
To determine the correct tax rate, you have to turn to a source like the sales tax jurisdiction and rate calculator from the NYS Taxation and Finance Department. It provides the correct tax rate, even if the zip code crosses municipal boundaries.
Automate Sales Tax Collection
Arke is a Sitecore Platinum Implementation Partner. Sitecore Experience Commerce 9 (XC 9) — the latest version of the experience management provider’s commerce solution — is a cloud-enabled platform that natively integrates content and commerce. Released in January, it introduces a new commerce engine built using Microsoft’s ASP .NET Core 2 technology.
XC 9 is an entirely microservices-based platform. All commerce features are readily available to connect all facets of a visitor’s interactions.
Coupled with Sitecore Experience Database‘s (xDB’s) service-oriented architecture, it’s now possible to interact, track and automate across all digital touchpoints.
“Sitecore Commerce has robust pluggable support for these providers, including providers like Vertex and Avalara. Sitecore Commerce is built around the concept of pluggable providers for things like tax, payment, shipping, and inventory,” he explained.
Vertex has developed an integration for its indirect tax solutions with Sitecore Experience Commerce 9, supporting accurate, automated sales and use tax calculations, as well as signature-ready returns, for both Sitecore’s on-premise and cloud technology. Users can automate and standardize taxability and calculation on every sales and purchase transaction on every product in every jurisdiction.
Avalara’s AvaTax solution cuts across zip codes to map rates to exact locations. It also delivers real-time rates at the moment of purchase.
For More Information …
- What’s Sitecore Experience Commerce 9 & Why You Should Care
- Sitecore Recognized 8 Arke Pros as MVPs
- How Arke Uses Sitecore to Help Clients Deliver the Best Experiences
Atlanta-based Arke, a Sitecore Platinum implementation partner, develops strategies and implements digital technologies for better brand experience for your customers.