Blog Posts The Wayfair Ruling and What It Means for Online Merchants
A recent U.S. Supreme Court ruling rocked the world of online merchants. While it’s unlikely to stop the meteoric rise of ecommerce, it promises to change the landscape significantly.
Ecommerce & Sales Tax Law
Since the start of the ecommerce world, sales tax has been a thorn in the side of ecommerce merchants and consumers alike. The current sales tax law had been set in Supreme Court precedence by 1992’s Quill v. North Dakota decision, which mandated “substantial nexus” (physical presence) to collect sales tax.
In the early days of ecommerce, this worked fine – if the company had a building with employees in the state they were shipping to, they collected sales tax. If not, then they didn’t. Consumers appreciated not paying sales tax for most of their transactions, seeing the tradeoff of sales tax for shipping charges as “fair enough.”
Then the industry exploded.
- Amazon grew to become an online retail giant – expected to take almost 50 percent of the S. ecommerce market by year end. They opened facilities in almost every state, expanding their nexus nearly nationwide.
- The Great Recession of 2008–2009 prompted state controllers and CFOs, desperate to balance the books without a tax increase, to interpret nexus in ways that were beneficial to them.
- Traditional retailers moved into the “omnichannel” world, forever blurring the lines between ecommerce and brick-and-mortar. The lines of nexus blurred with them.
- In 2015, the Direct Marketing Association filed a lawsuit challenging the law. While the Supreme Court decided 9-0 to remand the case to lower court (effectively leaving current laws in place), Justice Kennedy’s response clearly indicated that he was open to either another challenge to the sales tax precedence or for Congress to act.
It was only a matter of time for that challenge to arise, and it came in the form of South Dakota v. Wayfair. In a (non-partisan) 5–4 decision, the Supreme Court overturned the 1992 Quill case, deciding that physical presence was “unsound and incorrect” in the current age of ecommerce retail and opening the door to allow states to collect sales tax.
Currently, 45 states and the District of Columbia collect sales tax. If it stopped there, that would be confusing enough. However, factor in the local sales taxes that many cities and counties charge – that’s a total of 12,000 different sales tax jurisdictions. It’s likely to take time for states to sort this out. Enforcement won’t start tomorrow, but now is the time to start planning for the future.
Next Steps for Online Merchants
Tax software is likely a worthwhile investment, and there are some great products from companies like Avalara, Capterra, Sovos, Vertex and others. However, sales tax software may not be enough. Merchants also should consider their order management needs to help manage all of the transactions. An order management system (OMS) can integrate with sales tax software, not only for calculation, but also post-shipment – which is what creates that sales tax liability with different jurisdictions.
The prospect of adapting to the new environment may be overwhelming for many online merchants. An experienced third-party provider can be a valuable resource as they navigate next steps.