Wayfair vs South Dakota. What Does it Mean for Texas?

Before 2018, many online retailers were not charging taxes to their clients because of a Supreme court ruling in 1992 (Quill Corp. vs . North Dakota, 504 U.S 2980). In the landmark ruling, the court stated that a state could not force a firm to collect tax on its sales unless the firm has a physical address within that state. Although many states were unhappy with that view, it was only until recently that they started doing something to change the situation. In 2015, Supreme Court Justice Anthony Kennedy invited various states to take another look at Quill. This is what led to the South Dakota vs. Wayfair decision in 2018. The ruling overturned Quill and did away with the “Physical address” requirement.
The ruling ushered in a completely new era. 45 states started taxing remote sellers, thus closing that revenue loophole. But why 45 and not 50? Well, New Hampshire, Oregon, Montana, Delaware, and Alaska don’t have any sales tax policy.

The Nitty Gritty of the Supreme Court ruling

In the 5-4 ruling, the court overruled a law that has been around since 1992. The law worked well 3 decades ago when business was done by mail order and all the items shipped. Fast forward, 30 years, when 60 percent of all sales are done online, this is no longer tenable. The economy has changed, and Quill doesn’t make sense.

Here are the some of the problems that the court solved in the decision:

• Many states were missing out on revenue because the Quill law was outdated.
• The business landscape had changed, and online sellers had an unfair advantage because they were not paying taxes.

The court ruled in favor of South Dakota’s S.B. 106 tax law. The Wayfair decision applies to all sales of items transferred electronically, tangible property, or services offered in South Dakota. Also, it relies on client location as well as the number of sales and not the physical location of the seller.

What are the effects of South Dakota vs. Wayfair?

The Supreme Court did 2 main important things with this ruling:

1. It approved South Dakota’s law and similar laws in other states. According to the Sales Tax Institute, various laws that impose taxes on online stores based on a certain nexus have been in the work in states like Georgia, Connecticut, and Idaho since 2008. For example, Arkansas started using the same nexus in the South Dakota law on July 1st, 2019. The state also requires retailers with over $100000 in sales to remit tax. In California, the same has been applied to businesses with at least $500,000 in sales. This protects small business owners and gives them a grace period to grow.
2. The decision has inspired many states to take advantage of the digital revolution and boost their economies with the digital revolution. For instance, Chicago imposed a Netflix tax on various digital entertainment platforms like Sony for the first time.

How will it affect Texas?

There are 5 main ways in which the ruling may change the way businesses operate in Texas. This ruling means that it will be mandatory for all online businesses in Texas to collect taxes from customers even if they do not have a physical address. Although big retailers like Walgreens and Target will see very little impact, many small businesses will be affected immensely by these changes. Herein are the major effects of this decision on small businesses in Texas:

1. The state will approve tax laws individually. The state can now tax most mail orders and internet sales. While the state is not currently taxing across all lines, it is only a matter of time before it applies this new law to enhance revenue.
2. All online trailers must keep track of their sales and various tax law adjustments
3. Online retailers must set up reliable systems to collect tax. Although there is no software to help small businesses pay sales tax currently, there are new costs that they have to keep in mind. For instance, retailers will be required to submit monthly sales reports and payments to the state for sales tax, depending on where their clients live. For instance, if Group 1 Automotive has a customer in Atlanta, the Houston retailer will be required to send that sales report to Texas for that month.
4. Online retailers must re-analyze their portfolios. Small businesses that mainly sell their products and services on eBay, Etsy, and Amazon, may see their revenue drop immensely as the state starts charging sales tax. As such, these retailers must start re-evaluating their profit and loss accounts and make some tough decisions as well.
5. Brick-and-mortar stores will benefit. The South Dakota vs. Wayfair decision is a big win for brick-and-mortar stores in Texas with a physical address which previously found it almost impossible to compete with online sellers. Consumers now don’t have a choice of avoiding state tax by purchasing online. This may see some of them going back to purchasing from brick and mortar stores.

The main reason why this is very important for businesses in Texas is that it has overhauled everything in the retail industry. Similarly, it has provided more opportunities for small businesses to grow. According to research firms like eMarketer, general sales in the U.S grew by 16 percent, to around $450.8 billion in 2018. And the firm projects that e-commerce will account for around 20.5 percent of all global sales by 2022.
Bottom Line

The South Dakota vs. Wayfair ruling by the Supreme Court marks a big switch in tax laws and may have far-reaching consequences for businesses in Texas. Simply put, if you sell products or services in any state, regardless of whether you have a physical address or not, and the purchase is done online, you are now obligated to register and start collecting sales tax. Big retailers such as CVS, Nordstrom, and Nike will see very little or no impact on their operations. It is the small businesses in Texas that will have to re-adjust their bottom line so as to survive these new laws.