What the SCOTUS Sales Tax Ruling Really Means

Last week (specifically, on Thursday, June 21, 2018), the Supreme Court ruled on a South Dakota law relating to the collection of sales tax for online purchases. Cue a frenzy of brands and online retailers trying to decipher what this SCOTUS sales tax ruling really means. Here's a breakdown of the decision.

Background

South Dakota enacted a law that requires all merchants to collect a 4.5% sales tax if they a) have more than $100,000 in annual sales in the state, or b) processes more than 200 transactions in the state. (That part (b) goes back to an old rule that a business had to have a "substantial connection,” or physical presence, in a state in order to have to collect sales tax in that state.) South Dakota sued Wayfair, Overstock.com, and Newegg for violating that law. Before it got to The Supremes, the case was ruled in favor of the online retailers by lower courts because of that "substantial connection" standard that was previously the law of the land. It came from a 1992 case. So here we are, almost 30 years later and many, many more online transactions later, which is likely why SCOTUS heard the case.

The Ruling:  South Dakota v. Wayfair Inc.

The SCOTUS decision essentially says "no, lower courts go this wrong: South Dakota is in the right in enacting this law and can begin collecting sales tax on online purchases." Supposedly other states were eyeing the decision because they may enact laws similar to South Dakota's law. The majority opinion did say that for transactions that are so small and scattered, taxes shouldn't be collected. 

What the SCOTUS Sales Tax Ruling Really Means for Indie Brands and Online Retailers

Indie brands might rejoice at this news. Some have said that the “old rule” puts out-of-state sellers at an advantage, and in-state brick-and-mortar at a disadvantage. (The disadvantage being that in-state brick-and-mortar shops have to collect sales tax, while big online retailers didn’t necessarily have to do so.) Win for the #shoplocal movement!

For online retailers, particularly smaller shops, it’s not the kiss of death you might think it is. Remember, the ruling (if upheld by the lower court, which is likely) is that if you sell to customers in South Dakota, you have to comply with South Dakota’s new law. Note what the SCOTUS sales tax ruling doesn’t mean. It doesn’t mean if one or two customers in South Dakota purchases a handbag or handmade pillow from you, you have to collect and pay sales tax there. It also doesn’t mean that all online retailers now have to collect sales tax in every state.

The Point: Don't freak out...yet. While the current ruling applies to South Dakota's law, other states may soon enact similar laws. it'll be interesting to see which other states follow suit, since that's the cornerstone of whether and when folks will have to start collecting and paying in each state for online sales.