Over 35 states have laws on the books for remote sales and use taxes. This presents many challenges to Businesses that require online transactions. The Ruling, commonly known as the “internet sales tax,” overturned a previous law that enabled individual states within the United States to impose their own sales taxes on a company ONLY if that company had a physical presence in that particular state.
The Court’s Reversal on eCommerce Sales Tax
We have been reading a long series of breathlessly written articles speculating that the recent Supreme Court ruling on eCommerce Sales and Use taxes equals the end of the internet as we know it!
Fortunately for all of us, that’s just not true.
Although the ruling is important, for now at least, smaller eCommerce businesses will likely remain unaffected because of existing state laws and minimum applicable thresholds at the state level called “economic nexus” (more on that in a minute). But tools and automation are in place to help every online Shopify and BigCommerce store quickly and easily comply, and TaskHusky can even set it up for you if you want.
We’ll give you the complete run-down in this article.
But before we get started, we need to remind everyone that – even though we are experts in the Shopify and BigCommerce platforms for eCommerce, we are not attorneys and we do not give legal or tax advice. Make sure you read the disclaimer at the end of this article.
Let’s get started ….
eCommerce Sales Taxes Have Been Around Since 1992
The World Wide Web was born in August of 1991. And eCommerce really didn’t come along until a few years later. Since then, the last twenty-five years have seen an eCommerce explosion and – if you have a Shopify or BigCommerce site – you are a part of that revolution. But believe it or not, the entire set of laws regarding sales tax on the internet have been operating according to a few Supreme Court rulings from 1967 and 1992 – before there were any online stores at all. In fact, those ruling were applied to cases regarding out-of-state mail order catalogs and phone sales.
It’s likely that most – if not all – of the Supreme Court justices at the time had never even heard of the internet at that point.
In a nutshell, those rulings said that one state could not force a business in another state to do anything at all – including force them to collect sales taxes. But the court ruled that a state COULD impose taxes and regulations on businesses and citizens located in their own states. That’s why the test for whether a business has to collect sales tax has been “physical presence.”
But most states don’t call their sales tax a “sales tax.” They actually call it a “sales and use tax.” It’s an important difference and it has allowed states to charge the equivalent of sales tax on citizens as a “use tax” if they buy stuff out-of-state. They only do that now for super-big purchases and on businesses because – quite frankly – it’s ridiculously hard to collect sales taxes from individual people. So states just kept quiet about it, biding their time until they could find a way to cash in.
Some think that this is their time.
How Does the Supreme Court Internet Sales Tax Ruling Impact Your Shopify or BigCommerce Store?
Simply stated, if an eCommerce retailer is just doing business locally, they are already collecting and paying sales tax. None of this applies to you and you can go about your day. This new ruling only concerns eCommerce businesses in the United States that are selling products and services outside of their home state. And even then, it won’t apply to most small businesses unless they cross an important threshold called an “economic nexus.”
What is an “Economic Nexus”?
When you add up all the potential sales tax jurisdictions – including state, county, and city – there are more than 12,000 possible combinations. Each one can assign its own rate according to state laws.
It’s potentially a freaking nightmare.
Everyone agrees that this could be a huge problem. Even the new Supreme Court ruling points this out and suggests that states formalize an “economic nexus” definition covering their own state (or Congress can do it for them). The pointed to South Dakota as an example.
An economic nexus is a threshold – go above this line and you have to collect and report sales tax; stay below it and you do not. It is universally agreed that if you are physically located within a state, you have to collect sales taxes for sales to customers in that state. But aside from that physical presence, South Dakota says that an out-of-state business does not have to collect sales taxes for their state until their yearly sales volume is equal to or greater than $100,000 or more than 200 sperate transactions per year. So, if you are located in Virginia, unless your sales into South Dakota alone exceed $8,333.00 or 16 transactions per month on average, you’re all clear.
Technically, each state could set its own nexus point. But smaller states will likely just copy each other while big states will run the numbers and set their own. The way these kinds of things go, we will likely end up with about 20 or so nexus points which will make things a bit easier.
But it also means that you could reach nexus in larger states like California, Texas, and Florida more quickly while not reaching nexus in smaller states. But this is so new that it’s impossible to speculate at this point.
This Ruling is potentially Subject to Future Changes
Up until now, state and local governments were prevented from changing up their tax laws with respect to internet sales. But now that the Supreme Court has reversed itself, things could change quickly. But fortunately, there are tools and automation services to help us get things done and stay in compliance.
Sales and Use Tax Automation Services
It doesn’t matter how large your eCommerce business is, you must make sure that you are compliant. And all that tax compliance covers a lot of data points across those 12,000 tax jurisdiction combinations. One thing seems fairly certain … you shouldn’t be staffing up and assume the liability for all of that complexity when there are perfectly good services and automation tools that will do it for you at a reasonable price.
We found more than a dozen online services that claim to deliver just this kind of valuable service. We are not ranking them or playing favorites. But we have experience with two in particular that have worked out well and made our Shopify and BigCommerce merchants happy.
Avalara
Avalara is the most established company specializing in Oracle | NetSuite SuiteCommerce and Shopify tax compliance. In fact, their sales tax service is included by default in nearly all major eCommerce platforms – including Oracle| NetSuite ERP and SuiteCommerce, Magento, BigCommerce, Shopify, and Shopify Plus. Pricing varies. If you need help activating Avalara in your shop, start a task and our developers can help you out. You can read more about Avalara on their website: https://www.avalara.com/us/en/index.html
TaxJar
If you are looking for an up-and-coming, entrepreneurial service that is growing fast in the eCommerce space, take a look at TaxJar. They have good integrations for Shopify and SuiteCommerce and their accuracy and support are well regarded – starting at just $17 per month. We can help you install and activate their service if you need it. Here is a link to the TaxJar website: https://www.taxjar.com
A Potential Advantage for SMB Businesses
Remember that each state is going to set up their own “economic nexus” that determines when sales taxes must be collected. This nexus is defined by physical presence (an actual “real” location) and sales volume on the number of transactions and/or on total dollar amount. It’s fair to say that businesses like Amazon.com will EASILY reach this threshold in every single state. So that means that they will be required to collect sales taxes everywhere.
But …
This is not advice, but consider that a small business – which is normally at a significant disadvantage on pricing and costs when competing with Amazon and the big-box eCommerce stores – now have a small pull-back advantage. If their sales are below the thresholds set, then sales tax is not an economic factor for them.
Just an interesting idea … but time will tell.
Summary
Although the new Supreme Court ruling feels earth-shaking, the reality is a bit more mundane. Most Small businesses will not be affected in the short term, and larger eCommerce stores have easy access to automation services to help businesses stay in compliance. Even better, if state and use tax applies to you, these automation services are fully integrated, have good reputations, and are very affordable … even for small operations. And if you are on the Shopify or BigCommerce merchant platforms you have us to help when you need it.
In short, eCommerce is going to continue on just fine.
Additional Links and Resources
Shopify wrote up two articles that support our current opinion on these matters, they’re worth reading too:
https://www.shopify.com/blog/economic-nexus-ecommerce
https://www.shopify.com/enterprise/south-dakota-v-wayfair-economic-nexus
BigCommerce wrote up two helpful pieces as well:
https://www.bigcommerce.com/blog/south-dakota-v-wayfair/
https://www.bigcommerce.com/blog/online-sales-tax-ruling/
Here is the New York Times piece on the topic:
https://www.nytimes.com/2018/06/21/us/politics/supreme-court-sales-taxes-internet-merchants.html
Disclaimer
This article and references are written around breaking eCommerce news as a free service to the community. It represents our experience and opinions only. Things are changing all the time and no doubt other experts will have other opinions. As new developments occur and as new information becomes available, we might change the way we think of things too. Importantly, we are not attorneys and we do not give tax advice, so we think that it is important to consult those professionals if you think that any of this applies to you and your business.
Thanks for reading!
