Paying Taxes Isn’t Greatest Burden of Supreme Court E-Commerce Ruling

NEWS ANALYSIS: Paying myriad sales taxes won’t be the biggest burden small web retailers face from the June 21 U.S. Supreme Court Ruling. Small businesses will have to find a way to affordably handle all the administrative tasks related to tax collection.

Supreme Court E-Commerce Ruling

When the US Supreme Court announced its decision in South Dakota v. Wayfair on June 21, the initial reaction seems to have been that thousands of small businesses would immediately go bankrupt.

While this may be true because thousands of small businesses go bankrupt every year, it won’t be because of the Supreme Court decision or because the states get to collect more sales taxes. In any case, the taxes won’t start immediately anyway.

The Supreme Court decided that a previous decision, Quill Corp. v. North Dakota, which asserted that states could only collect sales taxes from businesses that had a physical presence in the state, was not correct in the world of e-commerce. In this new ruling court held that the previous decision had created an unfair distinction between sellers that were in-state and those that weren’t. So it sent the previous decision back to the lower courts for another try.

“Modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill. And the Court should not maintain a rule that ignores substantial virtual connections to the State,” the Court said in explaining its decision. “Helping respondents’ customers evade a lawful tax unfairly shifts an increased share of the taxes to those consumers who buy from competitors with a physical presence in the State,” the Court continued.

Instead, the Court said, the sales taxes should apply to sellers that have a significant quantity of business in a state, saying that this would only apply to large, national companies.

However, the Court didn’t say anything beyond that, such as what that significant quantity of business might be. It did say that states cannot place an undue burden on interstate commerce, which probably means that states can’t charge higher tax rates on out-of-state sales than on in-state sales.

Unfortunately, this isn’t necessarily much comfort to smaller web retailers. The problem isn’t the tax rates, but rather the administrative burden that goes with collecting and paying those sales taxes. In those states that collect sales tax, which is 45 of them, plus U.S. territories and the District of Columbia, a company that wants to sell taxable things in the state must register and then submit tax returns on a regular basis.

Another complication is the states don’t always have the same tax rate for all items. Then there are municipal or regional sales taxes. For a small business to be compliant, they have to know the appropriate tax rate, which they can then pass along to the buyer. But to do that, they need to know in what political jurisdiction the sale is taking place.

For example, in the area where I live near Washington, DC, there’s a city sales tax, a regional transportation tax and a regional sales tax. There’s a general sales tax, a different tax rate for grocery items and another tax rate for prepared foods. If I buy a vehicle, there’s yet another, different, sales tax rate for that.

While a small business in, say, South Dakota probably won’t be selling me a car, they would have to know what those other tax rates are, charge me accordingly if I were to buy something from them and then file a report to the state. In some areas there would also have to be reports to the locality and perhaps a county or region.

As you can see, it’s not the sales tax rate in specific locality that’s the issue, it’s the administrative cost. Fortunately, according to the Supreme Court decision’s commentary, most states apparently have threshold below which such sales tax collection and reporting isn’t required. But then the business would have to account for those thresholds. That’s only slightly less onerous.

At this point, it certainly seems bleak, but it doesn’t have to be, because there are solutions. For example, small businesses that sell through a larger web retailer may be able to have the larger retailer handle the tax administrative work.

This is the case with small businesses that sell through Amazon, which has been paying sales tax to states for a while now for purchases of its own inventory. The company also has a plan for smaller retailers that sell through Amazon. Other large retailers such as eBay or Etsy could do the same thing.

But what’s also needed is some legislation that would level the playing field for all businesses that sell products online. In his dissenting opinion, Chief Justice John Roberts advocated for exactly that, saying that congressional action is the only way to create a sales tax plan that makes sense. Whether that will actually happen in today’s dysfunctional environment is another question.

In the meantime, because the Supreme Court remanded the action to the lower courts, there’s still some time for other judicial action to happen before states actually start trying to collect those sales taxes. That means small businesses will have time to figure out how to deal with sales tax.

But if nothing else happens, don’t be surprised to see a software company create a cloud application that streamlines sales taxes for e-commerce and does it in a way that at least reduces the administrative burden.

Wayne Rash

Wayne Rash

Wayne Rash is a freelance writer and editor with a 35 year history covering technology. He’s a frequent speaker on business, technology issues and enterprise computing. He covers Washington and...