Navigating the New Digital Tax Era and the Impact of the Wayfair Decision
Last year, the Supreme Court ruled in favor of the state of South Dakota in the case of South Dakota vs. Wayfair, Inc. which overruled the physical presence rule for remote sales tax collection. This decision, commonly known as “the Wayfair Decision”, not only reflects the impact of eCommerce on our economy but has also held great impact on the way states are enforcing tax. Not only did the Supreme Court enact the Wayfair Decision, but they remanded the case back to the South Dakota Supreme Court to ensure that it met standards of constitutionality. Through the Wayfair decision, states are able to begin taxing remote retailers and regain the tax revenue.
This is great for state governments, but how has the Wayfair decision impacted business, especially small businesses owners over the last year? For instance, starting April 1stof this year, California is now required to collect sales tax from eCommerce companies who sell to a California address on any “physical” process, but not “digital” or electronic goods or services. This may be a confusing law within the new “digital” tax era, but it’s a great example of how complex these new tax developments can be especially within the scope of state governments and their varying laws. Let’s break down ways the Wayfair decision has (or will) impact remote sellers – and what it means for small business owners or companies who need to start collecting sales tax.
What the Wayfair Decision Means for Businesses
- States can now tax remote sellers. Ultimately, this will vary depending on which products a state decides to tax (i.e. the California tax law mentioned above) and can include tangible property, digital services, or both. The intention behind this new mandate is that states will increasingly standardize product definitions and which products are taxed.
- Retailers now have to track sales levels and tax law changes. This applies to all states where the retailers do business.
- Retailers must set up operations to collect tax wherever they sell. Retailers must also then pay taxes on that state’s schedule.
- Competition is a more even playing field. For remote retailers, this effect isn’t so beneficial. Now that they have to start charging tax, they lose the competitive edge of being tax-free, which is a huge competitive advantage. However, this does even the playing field for brick-and-mortar retailers.
Large online businesses most likely won’t feel much of an impact on these new laws mostly because of the size and scale of their business and profits. However, smaller businesses, if they reach the benchmarks, will feel the impact of these new state laws. And what about those who fall somewhere in between? Medium-sized businesses will feel the effect of these tax laws the most by having to deal with tracking law changes, sales volumes in varying jurisdictions, and collecting and paying the sales tax when needed.
If your company has an online retail component, it will be impacted by the recent Wayfair decision and that states’ new tax laws.