The recent Supreme Court ruling regarding online sales tax is going to significantly impact the US merchant services industry.
Back on April 27 of this year, we blogged about the South Dakota vs. Wayfair supreme court case regarding whether it’s legal for a state (South Dakota) to force online retailers (Wayfair) to collect sales tax from consumers. On Thursday, June 21, the Supreme Court ruled in favor of South Dakota, thus, consumers are going to be paying a little more when purchasing goods and services online.
In a nutshell, states now have the authority to order online retailers to charge sales tax on consumer purchases in accordance to said consumer’s state income tax. For example, recently I purchased a mountain bike online from an online retailer in California. The bike cost about $1,600. As a resident of Massachusetts, sales tax on my bike would be 6.25 percent, an extra $100.00, for which I would be potentially responsible if Massachusetts chooses to enforce the ruling.
We believe that most of the US states will pounce on this – state governments are always looking for new revenue streams. However, with our home office located in Portsmouth, N.H., whose moniker is ‘Live Free or Die,’ we’re curious to see how South Dakota vs. Wayfair impacts the Granite State.
How we got here
In May of 2016, South Dakota passed a law requiring large e-commerce businesses without a physical storefront but with a ‘significant economic presence’ in the state to collect sales tax from its customers. Most online retailers did so (Amazon among them), but three online retailers – including home furnishings giant Wayfair – refused, contesting the legality of such a tax. South Dakota argued it was missing out on much needed revenue. Wayfair’s rebuttal centered around the difficulty and expense in tracking each customer to apply their state sales tax to each purchase.
Possible challenge for small e-commerce businesses
With the many responsibilities that come with owning an e-commerce business, small business e-commerce merchants could be adding another (significant) task: Calculating the proper state sales tax per purchase. While this is a distinct possibility, so are exemptions for small e-commerce businesses. For example, when South Dakota enacted its online sales tax law, businesses that exceeded a threshold of $100,000 annual sales or 200 in-state transactions were required to comply (online retailers criticize those figures as too low).
In the very near future, we’re predicting each state will move fast to create their own limits and thresholds on how to tax online sales. Small e-commerce merchants may be holding their collective breath while US merchant services providers consider the impact.
South Dakota Wayfair ruling presents opportunities for US merchant services providers
In every crisis lies opportunity.
When we reported on South Dakota vs. Wayfair in April, we mentioned it may create an opportunity for US merchant services providers to create a type of value-add when boarding prospective merchants. A built-in sales tax calculator within the shopping cart (a boon for developers as well), enabling U.S. merchants to apply and disperse taxes accordingly, could be in the making.
State governments will cash in
Within the next couple of years, there could be an influx of construction crews working on new roads and bridges. Or, perhaps we could see higher school budgets as state governments will undoubtedly benefit from the ruling. States could earn between $8-33 billion a year by forcing businesses to charge merchants an online sales tax, experts believe.
We have every reason to believe most states will seize the opportunity to collect. In recent years, we’ve watched how several states have rushed to legalize daily fantasy sports. We’ve also seen states clamoring to legalize online sports betting, and even online gambling too.
We’re curious to know how e-commerce merchants will handle charging an online sales tax. Please leave a comment below.