How South Dakota vs. Wayfair Could Impact High Risk Merchant Processing

How South Dakota vs. Wayfair Could Impact High Risk Merchant Processing

Since we offer high risk merchant processing for e-commerce businesses in a sales tax-free state (New Hampshire), we’re taking particular interest in the South Dakota vs. Wayfair court case. We think many folks in the e-commerce payments industry are paying attention (or should be), since the U.S. Supreme Court will decide whether online retailers should collect a sales tax regardless if they have a physical presence in that state.

South Dakota relies on sales tax, it claims, more than most states. Thus in May of 2016, a law went into effect that required large e-commerce businesses without a physical presence in the state to collect sales tax. Many online retailers – including Amazon – complied, but Wayfair is among three online retailers contesting the legality of the sales tax.

A decision is expected in June.

South Dakota: We’re missing out

South Dakota’s argument for requiring online businesses to pay sales tax is two-fold:

  • It claims that it and other states are missing out on the opportunity for revenue – revenue, its advocates claim, for initiatives such as education, healthcare and infrastructure.
  • Along with e-commerce businesses having a physical presence in a given state, South Dakota is arguing that sales tax should be imposed on companies which have an economic presence within a state.

It begs the question: How can online businesses be fairly measured by ‘economic presence’ in a given state and what defines such? Additionally, a definition is needed for ‘large online retailers.’

Wayfair: Additional (significant) expenses, logistical nightmares

Should the Supreme Court side with South Dakota, it would add the task – and expense – of collecting and remitting state sales tax based on the state and residence of the online shopper to the online merchant.

Wayfair has a somewhat similar 1992 court decision on its side: Quill Corporation vs. North Dakota (1992), in which the court judged that remote businesses (such as mail order/telephone order businesses) could not be required to collect and pass on sales tax based on the state of a consumer’s residence. South Dakota’s claim contradicts that very ruling. A key factor is how many of the Supreme Court justices will agree.

What South Dakota vs. Wayfair means for high risk merchant processing

With a ruling for South Dakota, that it is legal for the state to collect sales tax from what it defines as ‘large online retailers’ with a ‘significant’ economic presence, then merchants will have an extra task on their hands in collecting sales tax accordingly. One the other hand, it creates the opportunity for an added value in high risk merchant processing: that is, assisting a merchant in figuring and applying the appropriate sales tax to each purchase and dispersing accordingly.

For now, however, we feel such accommodations are years away.

Our take on an internet sales tax

Considering the factors involved in South Dakota vs. Wayfair, our gut feeling regarding the outcome is a stalemate for the foreseeable future. The organization of such, the need to sort out best practices and proper distribution of an internet sales tax, is simply too overwhelming at this time to impose a fair solution. Thus, our colleagues in high risk merchant processing need not worry. Yet.

That said, the online sales tax issue is not going away, and our high risk merchant processing partners should take note. While both sides of the argument have made compelling cases, we feel the issue needs the input of experts in all divisions of payments – fintech, acquirers, processors and payment facilitators along with economists – because of the many open-ended issues.

To further support our ‘stalemate’ claim, we’ll refer to remarks by Supreme Court Justice Stephen Breyer as told to both sides of the South Dakota vs. Wayfair case:

“When I read your briefs, I though absolutely right. And then I read through the other briefs, and I thought absolutely right. And you cannot both be absolutely right.”

High risk merchant processing: It’s always changing

One of our favorite lines came from a recent payments tradeshow: ‘More has happened in the payments industry in the last five years than the last 50.’

The payments industry as a whole, is perpetually in flux. Thus, merchants and those in high risk payment processing need to adjust to remain relevant and competitive. Instabill is on hand to assist its network of merchants to do just that.

Our high risk merchant account managers are always on hand to discuss possibilities and options at 1-800-530-2444. Our goal is to help your business expand its online presence.

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