Why You Should Care About the Wayfair Tax Ruling, and How to Ensure Compliance
After about two months of deliberation, the Supreme Court ruled on one of the most closely watched cases in our industry. Internet retailers like Wayfair, Amazon.com, Overstock.com, and countless others can be required to collect sales taxes in states despite having no physical presence.
Online retailers previously benefited from not having to shoulder the burden of tax collection for individual states, and the savings trickled down to consumers who saw lower prices on the goods and services they purchased online.
This will likely not be the case for much longer. The recent court decision could mean billions of dollars in additional taxes for retailers, including those that sell digital goods as well.
Why You Should Care
Prior to the ruling, e-commerce businesses voluntarily collected and remitted sales taxes on a state-by-state basis. Moving forward, e-commerce businesses that sell goods are expected to take on the responsibility of collecting and remitting state taxes for each state that requires one, whether the business has a physical presence in the individual state or not. As of now, there's no immediate collection enforcement in place, but that doesn’t mean your business should wait to prepare for the coming changes.
For those of you selling digital goods and services online, you'll most likely be required to adhere to the current ruling and follow the evolution of the regulation as the courts continue to decide on the definition of digital goods and services, and how to apply taxes on them. The responsibility of collecting and remitting state sales taxes will continue to be increasingly complex and challenging, especially for larger states.
To illustrate that, New York and California, which have very complex statutes on the books, will have to make significant changes to their laws. For example, there’s the requirement that sellers remit taxes to all localities, as well as the state. These requirements don’t meet the Wayfair ruling standard, and retailers may have to take the issue to court.
Making Sure Your Business is Compliant With the Ruling
Your business will have to make changes to its internal teams and processes in order to be compliant with the new state tax regulation. The work involved, as well as investment in resources, can be daunting — especially for growing digital businesses.
Experts believe that these online companies will take a big hit in technology expenses. For example, a $20 million company with a 5 percent profit margin might have to pay several hundred thousand dollars to get its systems up and running, and the brand in compliance.
As state and local tax officials wrangle with various possibilities, many online retailers are simply bracing for new requirements. Some of them are potentially going to have to collect taxes for close to 10,000 different state and local jurisdictions. Software can help with cost and complexity, as can a multistate arrangement known as the Streamlined Sales Tax Agreement, which is meant to help simplify collections for businesses that sell to customers in the 24 states involved in the coalition.
What’s going to be easier? Hiring dozens of accountants to manage the thousands of state tax regulations across the U.S. and around the world, or working with a trusted partner to manage taxes on your behalf?
Things have evolved so much in the last 30 years regarding the volume of e-commerce for both physical and digital goods. That’s why it's so important to stay up-to-date on the most recent changes in legislation, tools and technologies. This will help to ensure your online operation is compliant, profitable and set up for long-term success!
Chris Lueck is the CEO of FastSpring, a global digital commerce, subscription billing and management platform.
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As CEO of FastSpring, Chris Lueck is responsible for guiding the company towards their mission of becoming the leading end-to-end e-commerce solution for digital goods and software sellers to start and grow their online businesses. With more than 15 years in technology and engineering, Lueck has a proven track record of developing, managing and scaling innovative products to meet the needs of business executives worldwide. Lueck earned a Bachelor of Science Degree in Electrical Engineering from the University of Virginia, and a Masters of Business Administration Degree in Finance & Entrepreneurship from the University of Southern California. He currently lives in sunny Santa Barbara, California.