Retailers aren’t the only ones who may have a busy few months ahead as they grapple with how to handle the U.S. Supreme Court’s online sales tax ruling. Sales tax software vendors such as TaxCloud are busy fielding inquiries and new business.
The U.S. Supreme Court on Thursday issued a landmark ruling in South Dakota v. Wayfair Inc. that could transform the e-commerce industry by allowing states and local governments to force online retailers to collect sales tax even if they don’t have a physical presence, or nexus, in the state.
In doing so, the court overruled the decision in Quill Corp. v. North Dakota, which stated that Quill, a catalog retailer, did not have to collect sales tax in North Dakota because it had no physical presence in the state. The court’s decision, which five justices signed on to, states that the Quill decision was “unsound and incorrect.”
Business booms for tax vendors
Within 24 hours of the decision, the volume of registrations for TaxCloud software almost tripled and the number of phone calls more than doubled, and has continued growing since, says David Campbell, TaxCloud’s CEO. TaxCloud offers merchants free software that enables them to comply with state and local taxation laws (24 states that offer the software pay for it). Additionally, visits to TaxCloud.com increased 154% in May compared with the previous month as retailers anxiously awaited the ruling, according to web measurement firm SimilarWeb.
TaxCloud, Avalara Inc., Vertex Inc. and other sales tax software vendors all stand to gain from the announcement, says Darren Hill, CEO and co-founder of WebLinc, which operates e-commerce platform Workarea.
“The real winner at the end of the day is the government and sales tax software companies who are smiling big this week,” Hill says.
Avalara’s stock soared as much as 33% on Thursday after the Supreme Court announced its ruling. Avalara provides sales tax software services to 12 retailers in the Internet Retailer 2018 Top 1000, including Wine.com Inc. (No. 334 ) and Leesa Sleep LLC (No. 286).
Scott Peterson, vice president of U.S. tax policy and government relations at Avalara wouldn’t comment on his company’s performance or if it has experienced a surge in business since the ruling, saying that Avalara is in a quiet period.
Advice for e-retailers
Sales tax vendors offer some advice for the likely many overwhelmed online retailers as a result of the decision.
“First, [retailers should] take a deep breath,” Campbell says. “Your world is not ending, and no states want to put you out of business. States simply want retailers to collect the sales tax those states’ citizens rely on to fund local priorities.” TaxCloud’s clients include Stack Commerce, No. 762 in the Top 1000.
“Retailers should review their e-commerce systems to determine how they are currently managing their sales tax obligations,” Campbell says. “All e-commerce systems have some sort of ability to add sales tax to invoices because even before the Supreme Court ruling, all retailers have been required to collect sales tax in at least their home state.”
TaxCloud gets its sales tax data directly from the states on a periodic—typically, monthly—basis, and each of those states test TaxCloud’s service to ensure it is correctly reporting and interpreting the sales tax laws in its state, Campbell says.
Once a retailer knows how it is currently complying with sales tax obligations, it can evaluate whether that mechanism will be viable to manage sales tax obligations in potentially all states with sales tax laws, he says. Five states don’t collect sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon.
“Many e-commerce systems have already implemented our sales tax compliance APIs,” Campbell says, meaning many retailers connect their e-commerce platforms to TaxCloud.
In addition to consulting with their internal accounting team or an outside accountant, retailers should reach out to their shopping cart software provider to see how its sales tax collection tools work, Petersen of Avalara says. “It’s hard to sell enterprise resource planning services or shopping cart software today that doesn’t have sales tax collection features built in or connections to third-party vendor systems that offer these services.”
Getting a view of what a retailer’s current e-commerce platform is capable of when it comes to collecting sales tax is important but retailers should understand that there’s a lot that needs to be sorted out, state by state, in the wake of the ruling.
Campbell says he expects states to start issuing statements and guidance for their in-state sellers, as well as to serve as notice to out-of-state sellers, regarding their understanding of the ruling as relative to the states’ current statutes.
“We believe many states may already have statutes in place anticipating yesterday’s ruling, while likely many more states do not have legislation in place to achieve the simplifications recognized by the Supreme Court as material considerations,” Campbell says.
Those include ensuring retailers have access to free compliance software and establishing sales thresholds below which retailers are not required to collect and remit sales tax. These thresholds are established by state legislatures to shield occasional sellers (such as lemonade stands or garage sales) from having to understand and comply with sales tax rules.
Peterson says, based on conversations with the states and looking at state laws, Vermont and Kentucky will have online sales tax laws that will go into effect on July 1.
A long road ahead
In general, nationwide, sweeping changes likely won’t be happening overnight, both experts say. “States have to enact a law to levy online sales taxes and the law has to meet constitutional requirements,” Peterson says.
While the ruling benefits sales tax vendors, Campbell also says retailers may be grateful that they have at least a little more clarity surrounding collection of online sales tax.
Until now, he says retailers across the country have been under constant threat as various states have enacted sometimes confusing and often dissimilar laws in efforts to bypass the Quill ruling of 1992. The Massachusetts’ “Cookie Nexus” law is a good example, he says. That law says that many internet vendors have already created a physical presence in Massachusetts through the use of software, advertising cookies and other third-party contacts in the state and can be required to collect and remit Massachusetts sales tax.
“That’s an example of a law that most retailers are either unaware of, or in disbelief that could exist,” Campbell says. “We believe retailers should be thrilled by the Supreme Court decision because there is finally some certainty regarding how and when they will be expected to collect sales tax in each state.”
There are many varied rules and thresholds in sales tax statutes across the many states, he says, but he adds that sales tax rules do not change very frequently and never change unexpectedly. Once a legislature makes a change, the state’s revenue department is responsible for implementing that change, which involves issuing public notices to taxpayers and also publishing updated data, Campbell says.
“This whole case has gotten a lot of press but this isn’t something simple where states just start collecting,” Peterson says. “Retailers still need to figure it out and states still need to figure it out.”