Wayfair Decision Sales Tax Insights for Online Marketplace Operators
Online marketplace operators already had a more complex set of sales tax considerations than traditional Ecommerce sellers. While single-seller digital commerce operators only needed to be concerned with their own physical nexus rules, online marketplace operators have to contend with tens to thousands of sellers. Some chose to collect the location data for their sellers and selectively collect sales tax accordingly, others began collecting sales tax in every state, as the Amazon Marketplace started doing in April of 2017. With the recent ruling against Wayfair giving States the rights to define their own sales tax collection parameters, online marketplace operators have to adjust accordingly to maintain collection and reporting compliance.
On June 21, 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair Inc. that online retailers across the US must collect sales taxes, even in states where they have no physical presence. This has been an ongoing issue in the United States as Ecommerce revenues have continued to grow.
Consider these facts. When the 1992 Quill opinion was rendered, stating that State sales tax could only be collected in cases where the seller operated a physical presence, US mail order sales totaled $180 billion. Flash-forward to modern times and US e-commerce and other remote sales exceeded half a trillion dollars in 2017. The US Government Accounting Office has estimated that in 2017 states had lost over $13 billion (USD) in taxes that were not collected in ecommerce transactions. The Court’s landmark judgement drew the attention of US President Donald Trump who praised the change as a victory for consumers and retailers.
The Decision & Reaction
Matthew Shay, National Retail Federation CEO, said that retailers “have been waiting for this day for more than two decades” because, in their view, it creates a more level playing field for both traditional stores and digital upstarts. Brick & mortar retailers have spoken out for years the competitive advantage that online sites have when they do not collect sales taxes.
The Wayfair decision is rooted in Article I, Section 8, Clause 3 of the US Constitution provides in part: “[The Congress shall have Power] To regulate Commerce … among the several States…” This language, known as the Interstate Commerce Clause, affords the Federal Govt. with the power to dictate the rules by which states may conduct business with one another. The States have been restricted from creating any regulations which discriminate against interstate commerce, and States may not impose undue burdens on interstate commerce.
The Wayfair decision overturned Quill Corp. v. North Dakota (1992). It held that the Dormant Commerce Clause barred states from compelling retailers to collect sales or use taxes in connection with mail order or Internet sales made to their residents. This is unless those retailers have a physical presence in the taxing state. This sales tax loophole however caused local brick and mortar businesses to complain that this is an unfair advantage, since they are forced to collect sales tax on every transaction.
Impact on Site Operators
Ecommerce retailers like Amazon got out in front of this and started proactively collecting sales tax in all states that have them on the items that it sells directly. That said, the Supreme Court ruling does affect some of its third-party sellers, which may not have been collecting the taxes when selling through other channels. Those third-party sellers account for a significant portion of Amazon’s sales.
The Wayfair decision is unlikely to affect online sales because consumers care about convenience far more than they worry about paying a few dollars more in taxes. Marketplace sales are more about vast selection and speedy delivery than they are about rock-bottom prices.
There’s good news here for marketplace operators who were likely already handling multi-state sales tax ratings with both sellers and buyers located in disparate locations. The Supreme Court ruling makes it easy for Marketplace operators to collect sales tax.
Earlier, online sellers only had to keep track of rates, charges, accounting, and filing for sales tax in two states; PA and NJ, until this change. Now they have to do the same for each of the USA’s States and Territories. That involves changes to their sales tax rating technology, their accounting practices, and the amount of sales tax filings and payments made. The reality is that some States will act upon this immediately and some will delay action or decide to make no changes to the status quo.
This ruling leaves it up to each State as to the handling of sales tax for online revenues, but it empowers them to require the collection of sales tax for all transactions conducted within their state, online and physical transactions alike.
As an Ecommerce operator, you need to adapt quickly to these new rules and be prepared to properly rate, collect, and account-for these new sales tax collections. We’ve created a handy checklist for what you need to consider in order to adapt to the ramifications of this landmark ruling. The basics are this:
- Physical Nexus still matters
- A new Financial Nexus consideration is in play
- States are actively jumping in to reap the revenues
- Use tax reporting standards
- Marketplaces have different rules
- Consider a Nationwide collect & remit strategy
Be sure to download this checklist for more details and please reach out to us (firstname.lastname@example.org) with any questions or if there is anything we can do to help your organization adjust to these new tax rules.