Last modified: 19. April 2019
On June 21, 2018 the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc. that states are allowed to impose and collect sales and use tax from retailers that have no physical presence within their state—such as online sellers—for sales the out-of-state retailers make to residents of their state. This ruling overturned two previous decisions of the court that restricted such collection if the business lacked a physical presence in the state and instead required the state to rely upon its residents to pay the sales and use tax owed on their purchases from out-of-state sellers. As there are 45 states in the U.S. who presently require sales and use tax to be collected, it is estimated that the states may collectively bring in $8 billion to $33.9 billion in additional annual sales tax revenue because of the ruling. For this reason, it is very likely most or all will follow suit because of this court decision.
This has the potential to significantly impact global ecommerce compliance—affecting interstate commerce sales within the United States as well as global companies selling into the U.S. We anticipate that many states will being acting on this by the end of 2018 or during their next legislative session a particular state require state legislative action. The State of Minnesota Department of Revenue, for example, already issued guidance on July 25th that it will be mandating the remittance of sales and use tax by non-resident retailers (includes marketplace providers) that do not have an existing physical presence in the State of Minnesota effective October 1, 2018.
Digital-only SMB companies may be impacted the most.
As this ruling will eliminate the physical presence requirements for determination of a retailer’s sales tax nexus it opens the border to more of a true borderless commerce model. Because of that, small and mid-size businesses who sell digital-only products online will have to implement changes to keep up with the demands of the various tax rules from all 45 tax collecting states. For brands who previously had a presence in only a few states but sold into many, you will now need to adhere to the individual tax codes for each state. Small and medium sized businesses who are trying to grow their direct-to-consumer channels will need to put new teams or solutions in place to maintain compliance and be prepared to respond in the case of an audit.
It will require more operational resources to manage the tax complexities.
Companies who previously didn’t have to worry about multi-state tax laws, collection and filing will now have to. This means there will be extra operational costs across many companies due to the state by state complexities. Since tax laws in the U.S. are determined at the state level, laws vary across the U.S. For example, states like Minnesota do not tax apparel, but its neighbor Wisconsin does. Companies need to be familiar with tax laws in every state in which they sell. States will be passing laws and updating requirements at different times, meaning your business will need to be prepared to rapidly understand and apply new tax laws and updated existing processes to ensure accurate collection.
The global implications for businesses selling into the U.S.
Global businesses selling into the U.S. are not off the hook either. If a company sells into the U.S., they must also follow these new tax laws. In many ways, selling globally is easier than ever before with consumers gaining interest in cross-border transactions. However, the nuances associated with maintaining tax and regulatory compliance around the globe can cause massive headaches for brands.
Digital River can help navigate these changes.
Having a partner like Digital River can help manage the new tax compliance implications without having to take the burden on directly. Digital River is a global company and we deal with global brands every day. We can help you manage these new tax laws from anywhere in the world. If you’re already a Digital River client, then no worries…you’re all set, we have you covered.
As Merchant and Seller of Record for our clients, Digital River manages the state-by-state tax law complexities of interstate and global online commerce, including international regulatory law compliance and taxes. To learn more about how we can manage the multi-state tax collection and filing that will result from this new ruling, contact firstname.lastname@example.org.