Justice may be blind, but it also recently turned a deaf ear to some retailers’ concerns. Due to a recent Supreme Court ruling, most out-of-state businesses across the USA will be required to collect sales tax, with or without nexus. What will this mean for third-party Amazon sellers?
The Supreme Court of the United States ruled last week in the case of South Dakota v. Wayfair, 17-494. It holds that physical presence – a.k.a. nexus – is no longer a factor in collecting tax for out-of-state purchases. South Dakota, a state that does not charge income tax, sees the change as necessary.
Unfortunately, because the physical presence rule was rejected and invalidated, this effectively means that the 1992 sales tax nexus decision has been overturned. All US states may henceforth charge sales tax on out-of-state purchases, whether the sellers have a physical presence (warehouse or office) locally or not.
In a nutshell, this legislation states that, if you reach a minimum sales threshold in any one state, you will hand over sales tax at the local rate to the state in question, regardless of nexus. For South Dakota and most other states currently charging sales tax, the minimum threshold is $100,000 or 200 transactions per year, as Internet Retailer explains here.
The law will be brought before Congress and the President for approval. The Trump administration is in favor of it, according to Inc.com. Should it be approved, it’s very likely that this ruling will have massive ramifications for small and medium businesses, according to various legislators cited by Internet Retailer, affecting how they operate and how much revenue they generate.
What Online Sellers Need to Know About this Sales Tax Law
- This new taxation rule is not retroactive, so sellers who haven’t collected this tax before the law comes into force will not be charged or penalized.
- Large online retailers were already compliant with the new law. Most top retailers collect this sales tax from their customers. Some of them have warehouses and offices in most states, so their business can’t be classed as out-of-state.
- Should they meet the threshold, third-party sellers operating on Amazon, eBay, Etsy, and similar platforms will need to charge more for their products to cover this extra tax and then hand it over to the local department of taxation.
Potential Effects of the Sales Tax Law
When it comes to tax compliance, all sellers would need to make some adjustments in terms of their tax filing software to comply with the individual rules of some 12,000 tax jurisdictions. For those who can’t or don’t want to use free state-funded tax software, it could mean integrating costly software packages that some sellers simply don’t have the expertise or the manpower to operate.
Businesses may also be subject to audits from tax departments from across the USA. Unfortunately, this means that they would have to comply with the requirements of administrations that do not represent their interests. After all, the owners, employees, and stakeholders of the businesses have no say in local elections.
According to Internet Retail, Overstock.com argues that the law would also affect innovation. As ‘small’ businesses (with sales of up to $21 million per year, depending on state), have less resources to invest in innovation, the economy as a whole would suffer.
Impact on Online Retailers
Obviously, sellers will need to budget for this new tax and to think of how they can collect it without losing too much business by raising their costs. Because of the threshold, sellers will need to monitor their sales constantly. As they get closer to their threshold, they will have these choices:
- stop listing a product altogether;
- refuse to offer delivery to certain states;
- absorb the extra costs.
Some may consider changing their business model. They may focus more on B2B sales locally, which would probably affect product diversity and lead to shortages. Some may focus on international expansion, and some may relocate altogether.
But for those who don’t want to change their business model, it’s likely that the law will affect every aspect of their business. They will need to absorb this extra cost and factor it into their pricing strategy. So, from the moment this law comes into force, an online retailer will have three options:
- apply the tax selectively during checkout, based on the delivery address the customer types in – which risks angering customers who are unaware that they’re being charged more;
- set a single price for all their customers, after estimating future sales from various states and averaging their tax rates, including city tax, state tax, county tax, etc. – which risks alienating bargain hunters and local customers;
- lower the price of the items to cover the extra tax, or apply discounts during checkout based on delivery address, so that customers don’t take their business elsewhere.
Not only will sellers have to factor this tax into their pricing strategies, but also into their purchasing, inventory management, shipping, and warehousing costs.
As they have less business with some couriers (especially for faster cross-state delivery services), their shipping prices will rise. As they buy less from their suppliers or they return more unsold merchandise to them, the terms of their contracts will change, meaning even lower margins.
Within years, these widespread changes could have remarkable effects on selling practices. But ultimately, to avoid a hike in the price of an item, online retailers will probably need to sell less online in general, not just out of state. To keep afloat, they’ll either downscale or raise prices substantially.
What This Means to Online Customers
Customers will feel the change instantly, and this will affect their buying habits. Once retailers come close to the tax threshold, they’ll simply stop listing and delivering products in certain states. This means customers will pay more to buy those products across state or locally, or refrain from buying them altogether.
They may choose to buy a product from one seller half the year, and from another the next, depending on who reached the threshold and raised the price. They may have cheap online products delivered to friends and family out of state. They may travel across state borders to get cheaper products. They may even turn to suppliers from overseas with ‘pretend’ local branches.
That’s because buying locally won’t necessarily be cheaper or more convenient, despite what the proponents of this law believe. You need to factor in local transportation prices, time, physical ability, and convenience. To assume that customers will go out of their way to buy products locally is unrealistic.
How the Online Retail Industry Could Change
Obviously, prices will generally go up because online retailers will be unable to sell cheaper items out of state. As local online retailers and brick and mortar shops have less competition, they have no incentive to keep their prices low.
Once prices are brought up, they’re very unlikely to ever drop back. Customers will continue to look for a bargain, though. So, since brick and mortar shops are less flexible and less responsive to price changes, local online retailers will sweep up the bulk of the transactions. This includes Amazon and other large retailers, which would grow even more.
Small online retailers stand to gain as well, if they don’t reach the sales thresholds. Unfortunately, this could lead to changes in how businesses are set up and run, including people choosing to set up multiple e-shops and businesses per year and shuffling inventories between them, companies going dormant mid-year, and companies relocating (even if it’s only on paper) several times a year. With jobs at risk, they may find loopholes quickly and come up with very inventive methods to circumvent the law.
Hopefully, we’ve given you some food for thought, and you’ll waste no time preparing for this massive tax change. If you’d like to find out more about the implications of this tax law on your business, please visit our partners, TaxJar or sign up for their upcoming webinar on June 27 at 12:30 EST on this topic and check out their highly-rated and globally oriented tax software while you’re there.
Melanie takes an active interest in all things Amazon. She keeps an eye on the latest developments and keeps Amazon sellers up to speed.