The U.S. Supreme Court ruled in a 5-4 decision in South Dakota v. Wayfair Inc. to reverse a longstanding ruling that requires businesses to have a physical presence in a state to be subjected to its state sales taxes.
Simply put: States can now charge sales tax on online purchases even if a company has no physical presence in that state.
What was the reason behind the decision?
The ruling was made to ensure consumers cannot avoid paying sales taxes through large corporations like Amazon or Etsy.
However, these corporations may need help to keep their sellers compliant with state tax laws. It’s unclear, however, if that burden falls on the corporation or the sellers themselves. Many sellers on these online giants act as independent businesses, so it may affect these businesses more so than the large companies themselves.
The ruling also prevents unfair competition with brick-and-mortar retailers, according to Daniel Castro, the Vice President of the Information Technology and Innovation Foundation.
Castro’s group, a nonpartisan research institute, supports the Supreme Court’s decision.
However, he acknowledged that in the past, the states have created laws and regulations to discriminate against online businesses in order to boost local businesses. Therefore, he believes Congress shout act to prevent this from happening. Acting, he believes, will help protect both small businesses and their consumers (who would suffer from higher prices to make up for higher sales taxes).
What does this mean for small businesses and consumers?
Higher sales taxes on small businesses usually means higher prices for consumers. Online small retail businesses, especially ones without a physical presence, may need to increase prices on products just to stay in businesses.
The ruling did not address what exemptions small business may have, which means the case may be litigated for years. There are over 10,000 state jurisdictions that govern sales tax across the U.S., all of which need to be accounted for.
However, the large number of jurisdictions isn’t the only aspect that complicates this decision. In many jurisdictions, certain products are taxed differently than others, often with only minor differences. This can be extra complicated for small business owners, especially if they aren’t sure of the minute changes in every state.
Will this help brick-and-mortar retailers?
In 2017, online purchases accounted for roughly $450 billion in retail sales (up from $360 billion the previous year). Meanwhile, many brick-and-mortar retailers see a continual decrease and sales. Some have closed multiple locations or even filed bankruptcy.
The National Retail Federation approve of the Supreme Court’s decision, hoping it will help high street retailers (Forever 21, Urban Outfitters, Adidas, etc.) compete with online businesses.
However, it’s unclear if this will help or harm smaller retail brick-and-mortar businesses. After all, if larger chains continue to boom in business, it increases competition. Some brick-and-mortar retailers may have expanded to an online store to help with this competition. Now, they may have to deal with taxes from both their physical location and their online location.
While it’s too early to tell just how much this decision will affect small businesses around the country, it does give the states more power over internet sales tax, which is something they may potentially abuse.