The Supreme Court heard arguments regarding internet sales tax last week, and whether or not online retailers should be required to pay state and local taxes. This decision will have a significant effect on small businesses - no matter which way the decision goes. As a Shopify merchant, it’s important to keep your ear to the ground as this case moves forward.
How We Got Here: South Dakota v. Wayfair Inc.
Tuesday’s case, South Dakota v. Wayfair Inc., asks the courts to overrule a 1992 case; Quill Corp. v. North Dakota (usually abbreviated to Quill), which decided that the commerce clause in the Constitution prohibits states from requiring out-of-state sellers to collect state taxes. A crucial detail is that, in the Quill decision, it was decided that this only applied to companies that did not have any physical presence within the state. Out-of-state companies with no presence would only be required to collect sales taxes.
South Dakota began this case in 2016, when the state passed a measure, Senate Bill 106, which considers how much business the out-of-state company does, instead of physical presence. Any business that does more than $100,000 in sales, or more than 200 transactions, will need to collect sales taxes, though the bill does not include retroactive liability.
The current case is the result of South Dakota suing Amazon, Wayfair, Overstock and Newegg. Amazon declined to challenge the law, and now collects sales tax in ever state that has one, with the exception of Amazon Marketplace partners, which are responsible for their own collection.
However, Wayfair, Overstock and Newegg have used the Quill defense to refuse to collect - which is how the Supreme Court found itself discussing a 26 year old ruling this week. South Dakota cannot enforce Bill 106 unless the Supreme Court allows them to.
Small Businesses Under Fire
No matter which way the ruling for South Dakota v. Wayfair Inc. goes, it seems that small businesses lose out. While many believe the ruling will serve to regulate the large retailers that South Dakota is filing suit over, the truth is that the small businesses that sell online, both through large marketplaces and through their own online shopping websites, will be hit the hardest.
Because of the increasing demand for two day, or even same-day, shipping, major online retailers such as Amazon have already established physical locations in most states in the form of warehouses, if not more, and many are already collecting state taxes. However, the small businesses that work through their marketplaces are not included, even if their goods are transported through those same warehouses.
Main Street Moves Online
If the request to overrule Quill is rejected, then brick-and-mortar, “Main Street” retailers will continue to suffer, as they have been throughout the rise of online retail, by being unable to compete with online pricing. According to recent data from Criteo, 90% of shoppers report that they’ve opted to purchase a product online after seeing it in-person in a local retail establishment. 55% of those consumers will purchase a product they’re looking at in a physical store from a competitor before even leaving the building.
With every year that local stores are required to pay more taxes than online store, their pressure on their state legislature to change the laws will increase.
That said, many are releasing the tax and pricing pressures on their small businesses by opening up their own online store through Shopify or other platforms, which allows them to expand their audience and level the playing field.
Online Merchants Eye The Threat
While online stores can move online to seek some relief, many are still highly motivated and applying pressure to their local governments. The threat of Quill being overturned has the attention of small merchants, and for good reason.
The most obvious repercussion of an overturn would be a need to either increase prices, or suffer a revenue loss. In addition to placing a higher burden on small businesses, Quill being overturned would create a new need for software that calculates tax requirements per customer, based on their location. This would includes not only geolocation data but also security needs that would prevent customers from spoofing their IPs or committing other fraud to get the lowest price. Of course, this software would be an additional expense that all businesses, no matter how small, would need to invest in, just in order to keep their businesses functioning as usual.
A Third Option: Congress
While this case is primarily viewed as binary - either we keep Quill or we don’t - there is a third option, which is seeming more likely by the day. That option is that the Supreme Court passes the decision to Congress, which will, instead of requiring the complicated and disorganized collection of state taxes, require a federal standard, which would then be distributed based on purchases.
The hope that either this third option will come to be, or that Congress will drop the case entirely and preserve online retailers’ tax benefits, has been so powerful that, on Tuesday, Shopify stock gained 8%, as reported by the Motley Fool.
Tax Resources For Shopify Merchants
Staying on top of taxes is both essential to the success of your company, and one of the most difficult aspects of running a business online. While navigating the American tax code is already notoriously difficult, the changing legislation can throw companies for a loop - especially if you’re trying to do it all by hand. Luckily, there are apps for that!
There are two tools that we frequently recommend to our clients:
This Shopify app increases the efficiency of your tax preparation by automating much of your accounting and creating intuitively compile tax reports. The software not only helps with federal filing, but also state taxes as well. Avalara TrustFile will keep your brand on top of deadlines so you never have to pay another late fee again.
We recommend Avalara TrustFile to our clients that have more complicated tax filings, or are looking for a more hands-on customer service approach.
Looking for a software solution to your tax problems? TaxJar may be the perfect option for your Shopify store. This app is a true technology solution, which makes it a great option for merchants who are looking for a comprehensive dashboard that’s plug-and-play.
The Future For Shopify Businesses? Murky, But Optimistic
Unfortunately, no one at Growth Spark has psychic abilities, but we’ve been working with online businesses - and the legislation that binds them - long enough to realize that the overturn of Quill would cause too much outrage for politicians to risk.
However, that said, do not ignore this case. States will continue to battle to regain the taxes they are no longer collecting, and it is the job of our state and federal governments to check their very real motivations.