The U.S. Supreme Court ruled in favor of South Dakota in the landmark sales tax case of South Dakota v. Wayfair yesterday, overturning more than 25 years of legal precedent that stopped states from collecting sales tax on companies without nexus. Many in the lighting and home furnishings industries are celebrating.
"This is an important victory for brick-and-mortar lighting retailers to help bring about retail fairness," Michael Weems, Vice President of Government Engagement at the American Lighting Assn., said in a prepared statement. "In the days and weeks ahead, the retail industry and state governments will dissect the court's opinion to develop the path forward. In its decision, the court upheld certain exemptions and protections for small and independent online retailers."
"The Home Furnishings Assn.(HFA) has been working on leveling the playing field for furniture retailers for several years now — decades if you consider the work started in the 1980s against trans-shippers," Sharron Bradley, CEO of HFA, said in a press release. "Marketplace Fairness has been the hot topic of every advocacy fly-in and many calls to action. Your voices were heard! Thank you to all of the members and the members of the Government Relations Action Team for your tenacity and diligence on this issue."
The court ruled in a 5-4 decision that overturned the precedent set in 1992 by the Quill Corp decision, which mandated that states could only collect sales tax from businesses with nexus (a physical location in a state). Back then, the justices felt it was unfair and burdensome to force mail-order and catalog companies to calculate state and local sales tax, but as e-commerce now accounts for a little over 9 percent of all retail sales, the stakes became much higher.
As a retailer, you may have several questions about what happened and how it will affect you and your customers. Here's what you should know.
What's in South Dakota's law
When deciding this case, the justices looked to determine the level of burden South Dakota's law would place on businesses — basically how difficult would this law make it for businesses large and small to collect and report sales tax. Remember, there are over 10,000 tax jurisdictions throughout the United States.
To ease this burden, the law stated that companies would only pay a 4.5 percent tax if:
- They handle more than 200 transactions in the state, or
- Their sales in the state topped $100,000.
This part aimed to protect the small businesses who sell online and might do a few one-off sales in different states. They would not be required to collect and file, though of course, it is the business's duty to keep track of sales to other states.
The justices also consider South Dakota's participation in the Streamlined Sales and Use Tax Agreement (SST) and the Streamlined Sales Tax Governing Board. Launched 13 years ago, the SST consists of over 20 member states and the District of Columbia. The agreement has four goals, says Craig Johnson, Executive Director: create a simplified system for tax leveraging, make the systems as uniform as possible across all states, compromise between states as much as possible and use the latest in technology to make it all possible. Johnson says the agreement makes tax leveraging easier while still allowing states to retain their sovereignty.
In addition to this agreement, SST also works with software providers it certifies to ensure businesses can easily calculate, collect and report sales tax in any jurisdiction within the U.S. The certified software programs are tested quarterly to ensure that all sales and local sales tax calculations are current. Voluntary sellers — those who did not have nexus in other states but chose to collect and report sales tax to other states — were usually able to get the software free or at a subsidized rate from the state governments. If the software should miscalculate, Johnson says the user will not be liable for an audit of their sales tax collection so long as they're using SST-certified software. Costs of software vary, but Johnson says there are reasonably priced systems including Quickbooks.
According to Johnson, there are 26 member states, one associate member state and the District of Columbia. In that 13 years, 3,900 voluntary sellers had collected and paid $3 billion in sales tax to states that would have otherwise been lost. South Dakota is one of the member states.
Feeling this question of burden had been settled, the justices sided with South Dakota.
What you need to know
Brick-and-mortar retails and industry associations have been vying for marketplace fairness, and this case is definitely a victory for them. But the story hasn't ended just yet.
States must now pass their own laws to compel e-commerce companies to collect sales tax. Many will likely use South Dakota's law as a template for their own laws, and the justices made clear in their opinion that harsher and stricter sales tax laws would be struck down in court. There's also the potential for Congress to pass legislation — be that today or in the distant future when the economy and the way we do business changes yet again.
Lighting and home furnishings showrooms should not assume that this decision will suddenly fix the current challenges that retail continues to face. E-commerce giants like Amazon, Walmart and Target were already charging sales tax.
Independent showrooms still need to battle the convenience of the internet, but it may not be as hopeless as you might think. Studies show Millennials and Generation Zers still value the brick-and-mortar experience, and it's up to you to give them a good one.
So now is the time to:
- Take a hard look at your website and ensure address and contact information is accurate.
- Create a Google My Business page to help your business show in search results.
- Develop or amplify your SEO strategy to make sure you can be found easily online.
- Identify the service of yours that makes coming to your showroom worth it. Hype it up in your marketing messages and social media posts.
So take a moment to celebrate this victory for sales tax fairness — and then it's time to get to work.
