Wayfair and the E-Commerce Sales Tax – What are the Implications?
Update August 24, 2018: Since this article was posted on our blog, several states, including Washington, have already begun introducing legislation to apply their respective B&O Excise tax laws to the online transactions subject to the Supreme Court’s ruling.
On Thursday, June 21st, 2018, the United State Supreme Court in the case of South Dakota v. Wayfair opened the door to individual states assessing sales tax against online retail sales. In what some are calling a wholesale overturning of the court’s previous 1992 ruling in Quill Corp v. North Dakota, the high court ruled that the individual states are free to assess retail sales tax against online sales regardless of whether retailers maintain a physical presence in their states. If the sale is to a resident of a particular state, then that state’s taxing authority has the right to collect sales tax from that transaction.
Immediately upon the announcement of the Supreme Court’s decision, the share values of online retail giants like Amazon, Etsy, Overstock, and Shopify slipped as fears of decreasing profits hung over wall street. On the other hand, share values of physically-situated retailers traditionally, such as Target, Wal Mart, and even the consistently struggling Best Buy increased by almost as much.
Although there have been numerous discussions around the likely ideological underpinnings of the Justices’ individual votes on this matter (i.e. states rights versus an overreaching central government, or big business versus small), one of the most profound notions to come out of the ruling is how irrelevant physical presence has become in the context of applying laws and regulations. Where physical location and activity used to be the key connections between a state’s sovereign ability to impose its laws on a person or company, otherwise known as “personal jurisdiction,” the highest court in the land has now determined that, as far as the government’s ability to collect revenue from commercial endeavors, such a requirement is no longer workable in the digital age.
Although there are a number of profound legal issues that will likely take years to make their way through the court system, there are a few things that online retailers, and the people who manage their technologies, should start thinking about right now:
The Business and Technology Costs of Patchwork Compliance
Since the Supreme Court’s Quill decision, online retailers have been able to operate without the burden of having to comply with each state’s individual, often times unique retails sales tax schemes. With the host of e-commerce platforms available today, such as Magento, WooCommerce, and Shopify, online retailers have been able to expand their businesses geographically almost from the very moment they launch their e-commerce sites.
While this kind of expansion has always been doable by physical retailers from a supply chain point of view (i.e. the ability to ship goods, process payments, and fulfill orders over distance), it’s been the inability to allocate the resources necessary to comply with a foreign state’s tax and labor laws that has kept many of those companies from crossing state lines.
With the high court’s recent ruling, online retailers will now have to confront many of those same costs when determining their scalability/expansion strategies. Furthermore, not only will those decisions have to be addressed at the business leadership level, but they will have to happen at the website/application design and development level too, as those online retailers who decide to expand or remain “US-wide” will need to ensure that both the front and back ends of their e-commerce sites and applications comply with each individual state’s tax laws and required notifications. This means that firms’ technology teams are going to have to work more closely with its legal teams to ensure that the necessary compliance requirements are met.1
Increase in Enforcement Activities
Along with the cost of complying with the complex patchwork of retail sales tax laws going forward, many experts are concerned about the costs associated with defending against and addressing enforcement actions by numerous different taxing authorities.
More than 40 states formally supported South Dakota in seeking to overturn Quill, and while those states have gone on the record in an effort to minimize concerns about any efforts they may expend to retroactively enforce previously-incurred tax liabilities, it appears that only a relatively few of them have gone so far as to legislatively hinder their ability to do so. Furthermore, as many of those states are struggling to balance their budgets and fund essential functions, it wouldn’t be at all surprising to see a significant uptick in the amount of retroactive enforcement by the individual taxing authorities. According to Andy Pincus, a lawyer who filed an amicus brief in Wayfair on behalf of California-based eBay, “I think you’re going to see a flood not only of demands for ongoing tax collection but retroactive audits.”
Of course, dealing with tax collectors in one state can be extremely taxing (pardon the pun) on a company’s time and resources, and so it doesn’t take any imagination at all to comprehend how difficult and expensive it would be to have to fight those battles on multiple fronts. For large companies like Amazon (who, by the way, already pays state retails sales tax on its direct sales), compliance is already an established part of its operations. It will likely absorb the impact of Wayfair without too much fuss and will use the ruling as a way of furthering its competitive advantage.
But for nearly everyone else – all the firms of fewer means – their leadership will need to pull on all available resources (legal, finance, operations, and technology) to come up with a new strategy for addressing this shift in the legal landscape online retailers have benefited from for years.
A disclaimer: This post does not constitute legal advice, but rather, offers a perspective on how a new Supreme Court ruling could affect E-Commerce, which matters to many of our clients and collaborators. Read more to learn about this interesting legal development and how it impacts our work as digital consultants and businesses with a strong digital presence.