They say in life you can count on two things – death and taxes. However, the dependability of sales tax as an online retailer is potentially about to change.

E-commerce is one of the fastest growing industries in the world. More and more companies are starting up exclusively online to save on substantial start-up costs. Brick-and-mortar storefronts are expensive. Rent and utilities in popular cities are often prohibitively expensive for entrepreneurs. Minimum wage salary costs for cashier-only staff are expensive and increasing in cities across the nation. Physical stores are limited in what potential customers they reach. Alternatively, online retailers through e-commerce can reach consumers across the country with relative ease.

If you are selling products online to consumers out of state, you are probably concerned about shipping costs and taxes. For the past fifty years the law has been that as an online retailer you only have to pay sales tax in states where you have a physical store. In 1992, the Supreme Court held that shipping out of state does not necessarily require companies to pay sales tax. Since the Court’s decision, retailers have been increasingly relying upon online sales, which is especially beneficial for retailers who sell goods across the country to states with higher sales tax. Companies can strategically plan where they set up their physical headquarters and stores to avoid sales tax. Some states, such as New Hampshire and Oregon, have no sales tax, which means companies can have a physical presence in states that do not have sales tax, ship across state lines, and avoid paying sales tax altogether.

For entrepreneurs the current law regarding sales tax is extremely beneficial. Entrepreneurs often rely on third party websites, such as Amazon.com and Etsy.com, to reach out-of-state customers. Without having to worry about sales tax in every single state they ship their goods to, entrepreneurs can expand their brand identity and following nationally.

However, this is likely to change. In 2016, South Dakota passed a law that is in direct conflict with current law, allowing the state’s Department of Treasury to collect sales tax from out-of-state online retailers who sold goods to South Dakota citizens. South Dakota passed the law because collectively, states have missed out on an estimated twenty-three billion dollars of tax revenue from online retailers. Online retailer Wayfair.com has challenged the law, and the case is now headed to the United States Supreme Court.

In previous cases the Supreme Court has seemed receptive to overturning the current law, allowing states to decide to collect sales tax on out-of-state retailers. The Supreme Court is expected to rule on the South Dakota law and decide that online retailers have to pay sales tax in every state they ship products into.

Entrepreneurs should be aware that there is potential for the sales tax law to change, even if the Supreme Court does not change the current law. Congress has tried unsuccessfully to change the sales tax laws in 2011 and 2013 with the Marketplace Fairness Act. The Act failed to pass, but with more pressure from state governments, Congress could potentially choose to require online retailers to pay sales tax in every state they sell goods. States, such as South Dakota, have also passed legislation that would require retailers to have some form of physical location within their state to sell certain goods in order to receive sales tax.

If entrepreneurs are subjected to sales tax in every state where they sell and ship goods, they may suffer much higher operational costs. More immediately, requiring sales tax to be paid in every state where an entrepreneur ships products may lead to substantial administrative costs for retailers. If sales tax must be paid in every state where goods are sent, online retailers must keep excellent records to ensure that they accurately pay sales tax to each state. They also may potentially be responsible for completing fifty different states’ sales tax forms and documentation.

Some entrepreneurs may decide to not sell or ship their goods to a particular state to avoid paying sales tax altogether. This may lead to further complications with websites and the ability to restrict shipping options to individuals who live in certain states. Online retailers may weigh the administrative costs of completing state sales tax returns against the amount of money they make from selling goods in a certain state.

Going forward, entrepreneurs should be aware that the sales tax law may substantially change and has the potential to impact their business. Entrepreneurs should make sure that if the law changes they have the necessary staff and procedures to monitor and pay state sales tax.

Sources:

1. Quill v. North Dakota, 510 U.S. 859 (1992).
2. http://www.scotusblog.com/wp-content/uploads/2017/10/17-494-petition.pdf
3. https://www.supremecourt.gov/DocketPDF/17/17-494/23025/20171207150426999_2017-12-07%20Brief%20in%20Opposition%20to%20Petition%20for%20Cert.PDF
4. https://www.law.cornell.edu/supct/html/91-0194.ZO.html
5. https://www.bna.com/first-digital-sales-n73014470458/
6. https://www.reuters.com/article/us-usa-court-tax/u-s-supreme-court-takes-up-state-online-sales-tax-dispute-idUSKBN1F12JG