Now that South Dakota v. Wayfair has paved the way for states to collect taxes from online retailers even if they lack a local presence, companies need to be prepared to comply with upcoming interstate tax laws. While the full effects of the decision have yet to become clear, the time to prepare is now.
“It’s a really important case, and it has a lot of implications,” said Ted Bernert, Partner at BakerHostetler in an interview with Retail TouchPoints. “We’re going to have to see how the states react, and people really need to focus on what the states are saying in terms of the obligations.”
Smaller businesses will be hit particularly hard by the ruling, as larger players can better absorb the cost of complying with updated state sales tax laws. This could have a significant impact on the revenue of small businesses: a survey by Insureon and Manta found that 43% experience significant revenue growth with online sales, while 38% experience moderate revenue growth. Increased sales now may mean increased sales taxes.
States may take some time to introduce new legislation, but Bernert suggested steps retailers can take immediately to prepare for any upcoming changes to tax law:
- Study current laws where you’re selling. Retailers should keep an eye on sales tax developments in any states where they do business. Even if they’re compliant in their home state, they may now be responsible for different procedures in other states.
- Check your authority to collect taxes. Not all states automatically let retailers collect taxes. Retailers need to make sure their company is set up to accept the sales tax in every state where they do business.
- Collect exemption certificates. Even wholesalers, which are mostly exempt from sales taxes, should make sure they get certificates from their customers to ensure they are complying with local laws.
Congress Can Prevent A 50-State Patchwork
Meeting the standards of different sales tax laws in different jurisdictions could prove expensive for retailers. The Streamlined Sales and Use Tax Agreement would provide a level of uniformity in terms of defining taxable products and tax exemption rules, but while 24 states have already signed up, they represent just 31% of the U.S. population.
The other concern is retroactivity, according to Bernert. States may be able to point to existing statutes that let them collect taxes from online sales made before June 21, 2018 when the Wayfair decision was made. While the Supreme Court didn’t rule on these issues, Congress’ authority over interstate commerce gives it the power to help put them to rest.
“What we really need is for Congress to set the rules now, and retailers should be all over that,” said Bernert. “They should be doing everything they can to encourage Congress to make the rules that the Supreme Court did not want to make.”
Legislation could designate that in order to collect taxes under Wayfair, states would have to bring their codes into compliance, or near-compliance, with a system of uniform definitions for taxable products and services. Additionally, Congress could prevent states from taxing sales made before the decision, and provide retailers with a grace period for them to set up the systems necessary to collect sales tax across state lines.