How will South Dakota v. Wayfair Affect Vendors?

This past week, Amazon was featured in many headline mainstream articles in response to the Supreme Court decision in South Dakota v. Wayfair Inc.  In this verdict, SCOTUS ruled that “internet retailers can be required to collect sales taxes even in states where they have no physical presence” (New York Times). Although Amazon was not directly involved in the case, as the leading e-commerce marketplace, many could not help but speculate what affect this ruling will have on them.

If you’re not familiar with the case and its history, here are the highlights:

It all started in 1992, with the case of Quill Corp v. North Dakota.  It was determined in this case that “a state could not require a merchant to collect sales tax on items that were shipped through the mail or by common carrier, if the merchant had no physical presence in the state (Forbes).If you can remember back to 1992, when Bill Clinton was president, the Summer Olympics were held in Spain, and Cartoon Network was established, you might recall that purchasing products over the internet was almost unheard of. In fact, the internet had only opened up to commercial use one year prior.

As online retailing has grown to become a multibillion-dollar industry, there has been a varying sense of agreement as to whether this still makes sense or if there was enough reasoning for reconsideration of this decision. E-commerce already had a noticeable edge on brick and mortar stores with wider selections, convenience of delivery to your doorstep, and cheaper prices. And Justice Anthony M. Kennedy speculated that the Quill decision caused states to lose annual tax revenues of tens of billions.

In 2015 Justice Stephen G. Breyer called for a review of the 1992 ruling, which sparked many states enact “kill Quill” legislation beginning the legal process of reversing the initial ruling. South Dakota was one of these states, enacting a law requiring all merchants with more than $100,000 in annual revenue or more than 200 sales in a their state to collect a 4.5% sales tax. When Wayfair, Overstock.com and Newegg violated this law, state officials opened a lawsuit against them.

On June 21st, SCOTUS gave their final verdict in South Dakota v. Wayfair, Inc. overturning the 1992 ruling that prohibited states from collecting sales tax from businesses that do not have a “substantial” connection to that state, and opening the doors to allowing for the collection of state sales tax from internet retailers, even when those who have no physical presence in those states. Many see this verdict as a major and necessary step in leveling the playing field between e-commerce and brick and mortar stores.

Other states are now quickly following suit to model state legislation after South Dakota’s law, so as not to miss out on an opportunity for tax collection. But Justice Kennedy has cautioned that not all purchases may fall under the court’s decision, such as significantly small transactions, and that many new state laws could face future legal questioning (Forbes).

While South Dakota was the clear winner in this case, they are not the only ones who will see a benefit; likewise Wayfair will not be the only one seeing or needing to make change their practices.

Here’s who is most likely to be affected:

  •       Customers will likely encounter higher prices on retailer sites that were not previously incorporating sales tax, like Wayfair
  •       Small e-commerce start-ups looking to sell nationally, while also stay in compliance with each state’s unique tax requirements
  •       Medium-size e-commerce merchants like Wayfair.com and Overstock.com, who have been skirting state sales tax in states where they do not have physical presence
  •       3rd -Party Amazon sellers
3rd-Party sellers on Amazon were previously not required to pay sales taxes, which they now will be. The ruling provided no specific guidance about whether Amazon or the 3rd-Party sellers themselves will be responsible for deriving and collecting sales tax, however this will be a significant change for many. Some states have already provided specific regulation indicating this is the responsibility of Amazon, such as Washington and Pennsylvannia, but this has been determined on a national level. And given Thursday’s ruling, states may revise their tax laws to elicit sales tax from the 3rd-Party sellers over Amazon (CNBC).

Now for the good news, here’s who will likely benefit from this ruling:

  •       States who were not previously receiving taxes from sales (est. up to $33 billion annually)
  •       Brick and mortar stores, particularly local stores and shops in rural areas
  •       Amazon and Amazon vendors

Here’s why Amazon and Amazon vendors are set to benefit: 

Amazon was already collecting sales tax on products it sells directly in the 45 states that collect a sales tax, so vendors selling through Vendor Central are not likely to see the price of their products increase or make any changes to their sales processes. However, this is not the case for 3rd party sellers, who will be required to make this change. This means that 3rd-Party competition could become less of a rival if their prices increase, or they feel discouraged by the knowledge that they must now navigate state specific tax laws - an added stress for sellers looking for an easy profit.

We look forward to following this closely and will update you as we do.