In the modern eCommerce age, we purchase products online quite a lot. In the first quarter of 2018, eCommerce sales accounted for 9.5% of all sales. As eCommerce becomes more prevalent, the government has taken steps to regulate online sales the same way that they regulate in-store purchases. A recent Supreme Court ruling is now allowing states to collect sales taxes from all purchases. Read on to learn what this means for your eCommerce store, and what you need to do to adapt.
The Bottom Line: A recent Supreme Court ruling permits states to collect sales taxes on all eCommerce purchases. If you sell online, your website needs a major update to make county-specific taxation possible.
The Case: South Dakota V. Wayfair Inc.
Since the internet’s inception, states were prohibited from collecting taxes on out-of-state online consumer purchases. This policy, called the sales tax nexus, required only companies with a “sufficient physical presence” to pay state sales taxes. Companies like Best Buy, which have an established physical presence, are required to pay sales taxes, even on products sold online. In essence, these policies lingered from an era when online sales were fundamentally different in nature and volume. But, the recent landmark case is changing all of that, and it will have a significant impact on your eCommerce store.
The state of South Dakota, which does not charge an income tax, is reliant on sales taxes for income. In an effort to boost this income, South Dakota legislators passed into effect a law that would allow them to collect sales taxes on all online purchases. Wayfair was one of the vendors that challenged this legislation, and the resulting Supreme Court case saw South Dakota come out on top. This precedent changed the game for all states that charge a sales tax, allowing states to collect from all eCommerce transactions made by residents.
The Verdict: States Can Collect Sales Tax on All eCommerce Purchases
The way that eCommerce stores do business has changed. On June 21st, the Supreme Court issued a verdict that permits states to collect sales tax on in-state consumers purchasing items from out-of-state eCommerce stores. This policy complements the existing taxation policies, which already permitted states to collect on in-state residents purchasing from in-state eCommerce stores. This ruling extends beyond Amazon, and also impacts smaller, niche eCommerce stores.
What Does This Mean for eCommerce Stores?
eCommerce stores can vary in complexity. Some may only have a handful of products, while others using more complex content management systems like Magento 2 may venture deep into the hundreds (or thousands) territory. Regardless of the quantity of available products, they are all subject to a state sales tax. Your eCommerce store needs a technical solution to tackle the complexity of this project.
State taxes can vary drastically — not only by state, but also by county. So, customers living in Broome County, NY would pay a drastically different sales tax than NYC residents. Your website needs to reflect those tax rates.
For example, an eCommerce store based in California needs to charge customers throughout the country the appropriate rate. Your website needs to automatically charge customers living in Massachusetts a different rate than California residents. And, the sales tax rates in Boston may differ from those in Springfield.
The Solution: A Dynamic Sales Tax System
From a technical perspective, a simple solution simply won’t work. On paper, it might make sense to input every zip code in the country, and the corresponding tax rate. Aside from being a logistical nightmare, this approach also ignores the (albeit minor) changes in sales tax rates.
The only reliable way to prepare your website for this is a dynamic, automated state sales tax solution. We can configure the back end of your website to charge customers based on the location. By tapping into a database with constantly updated tax rates, we’ll ensure complete accuracy, without any room for error. Configuring your website to achieve this increased capability is the only way to remain in compliance with federal and state tax laws. In the future, integrating this dynamic taxing functionality will be a critical aspect of eCommerce web design.
Taking this step is a necessary measure for any eCommerce stores looking to continue selling products uninterrupted.
What’s the Penalty for Non-Compliance?
While the details regarding this recent landmark decision are still forthcoming, the penalty for non-compliance will not be light. Failing to collect state taxes will, in essence, be the same as neglecting to pay taxes. Regardless, your eCommerce store will still be held accountable for payment — presumably from your own pocket. Denying these charges may even lead to a tax audit. By this point, you’ll have compounded interest rates to contend with.
Ensuring that your website is equipped to handle these complex tax rates is imperative.
Prepare Your Website for the Future
The team at Logic Web Media is more than qualified to handle this difficult website coding project for you. As eCommerce professionals, we are capable of handling everything from site layout, to product organization, and beyond. We can adjust your existing site to charge customers based on their billing location. Contact us to start the transition, and have the peace of mind that you need as an internet proprietor.