In the late 90s, Amazon began expanding its offerings beyond books, quickly embracing the Internet and leveraging technology to boost sales and exploit dated tax laws. Thanks to the proliferation of the Web and a rise in the popularity of e-commerce, Amazon rapidly scaled its business to offer a range of products and services directly to customers anywhere in the nation.
The sheer breadth of the company’s reach provided a significant competitive edge over its local, brick-and-mortar counterparts. However, Amazon’s competitive advantage didn’t stop there. The Internet afforded the e-tailer the luxury of being “always on” and open for business 24/7, without all the costs associated with operating a physical storefront.
Furthermore, under the old tax regime, states could not force sales tax collection by vendors that didn’t have property or employees in the state. While its brick-and-mortar brethren were forced to charge consumers an extra 5-10 percent on goods and services, Amazon was able to get around the fees.
To put this into perspective, in the razor-thin margins of retail, 5-10 percent is often equivalent to a store’s profit margin. The impact of this tax advantage cannot be overstated; it played a critical role in Amazon’s ability to scale quickly and gain a monopolistic advantage over competitors tied to physical locations.
During this period of rapid expansion, it is not surprising that Amazon fiercely opposed changes to the physical presence standard. It spent hundreds of thousands of dollars lobbying Congress to maintain its interpretation of the U.S. Constitution’s Commerce Clause, arguing that change would have a devastating impact on small and medium-sized retailers engaging in interstate commerce.
However, there has been an interesting shift in attitude over the past decade. As increasing consumer demand for fast delivery has forced e-tailers like Amazon to open physical locations and fulfillment centers throughout the U.S, the tax advantages once offered by the physical presence rule have quickly faded.
As a result of its newfound position, Amazon changed its “principled” opposition to the tax, claiming discrimination against and undue burdens upon retailers engaging in interstate commerce, into one of “principled” support. It seemed as though, overnight, Amazon no longer was concerned about the administrative and compliance costs that would have a devastating impact on smaller mom-and-pop retailers, and now was far more concerned with the effect that US$13 billion of uncollected taxes had on state budgets.
Amazon stopped talking about how state-imposed sales taxes would hurt small operators and shifted the dialogue to how school-aged children were suffering due to reduced public funding for education.
As Amazon’s position on sales tax only changed the second its individual interests did, it is clear the “principled” part of Amazon’s position was its unrelenting commitment to uncompetitive behavior. Amazon was interested only in ensuring that no competitor — big or small — would be able to take advantage of the same dated tax laws that had allowed the company to scale as quickly and as aggressively as it did.
Despite the monopolistic behavior by some of the biggest names (and deepest pockets) in Internet retail, the Wayfair v. South Dakota ruling — from a future taxation perspective — is not going to have a significant impact or halt the growth trajectory for smaller players in the industry.
Online shopping is one of the most popular activities worldwide; last year customers spent more than $353.7 billion in the online channel in the U.S. alone. With all of this activity, a majority of shoppers have been demonstrating that the inclusion of sales tax does not phase them, as it is something they are used to dealing with both on and offline.
Fraud and Taxes
With a longstanding, if often untrue, narrative that online purchases are more fraud-prone than in-person ones, consumer worries about credit card fraud and other data security concerns have been viewed as more significant impediments to online retail adoption.
Sixty-eight percent of shoppers in a 2017 Internet Retailer survey identified worry about fraud and security issues as an impediment to making a purchase online. However, highly publicized breaches of offline retailers over the last couple of years have created a much greater awareness of threats in the brick-and-mortar channel. As a result, the perception among consumers that online payments are more dangerous has decreased.
In addition to consumers becoming less concerned about the risks of fraud, they are used to paying sales tax both online and off. The extra cost consumers will have to pay will not be significant enough to change their behavior and drive them to abandon e-commerce.
Most people these days already are used to paying sales tax for purchases, whether made online or off. This is especially true with younger consumers; both millenials and gen Z grew up with the Internet and are comfortable with online shopping. Many young people prefer the convenience of a click and home delivery over driving or walking to their local retail outlet.
As today’s youth progress in their careers, they will have more disposable income to spend on discretionary goods. This trend will continue to drive the market share for online sales regardless of this ruling.
While Wayfair v. South Dakota has made sales tax more complex and challenging for business, e-commerce is well positioned to continue to thrive. That said, if compliance issues aren’t addressed properly ahead of time, companies risk severe issues with customer experience. These types of problems have the potential to devastate the long-term viability of a business.
The South Dakota v. Wayfair ruling is a minor speed bump along the road to e-commerce growth. With a focus on compliance, companies of all sizes are well positioned to thrive. To make it through this transition without skipping a beat, companies must invest in compliance measures now. Following are seven key issues to address.
1. Do You Have a Sales Tax Nexus?
A sales tax nexus is just a fancy term for a “significant connection” to a state. A nexus can come from having personnel or physical inventory in a certain location, but it also can come from selling a volume of transactions.
In most states, it is 200 transactions. Understanding the states you need to comply in is a crucial first step. After that, it is vital that you make sure your business is registered where it is required.
2. Outsource to an Expert
There are many nuances in tax regulations from state to state, and the more products you sell, the more complexity you encounter. The U.S. has more than 12,000 tax jurisdictions, all with different rules about how to tax and at what rate. Add to this frequency at which regulations change, and the case for outsourcing this component of compliance to an expert makes itself.
Besides, sales tax compliance is not profitable; companies are better off spending time and effort on sales and other revenue-generating activities than figuring out sales tax compliance. Leave it to an expert.
3. Pay Attention to What is Taxable in Each State
Not every state taxes the same things, and some approach the same products differently depending on the context.
For example, Wyoming does not tax custom computer software, but it does tax “off-the-shelf” computer software. Some states, but not all, tax clothing. It’s crucial to understand which products are subject to sales tax.
4. Settle on a Single Payments Provider
Partner with a reputable company and stick with them. It is not uncommon for small and mid-sized companies to change merchants frequently or to use multiple systems.
Using multiple payments providers creates issues with consistent reporting and accounting, and it can result in costly headaches down the line. Documentation needs to be meticulous, and it is easier to keep straight in one centralized place, especially if the records are requested as part of an audit.
5. Automate Tax Compliance
Sales tax compliance is not a profit center. Businesses want to minimize both the risk of an audit and the costs of compliance.
Find good software that allows you to calculate rates, file forms, and remit taxes while reducing staff time. As the Supreme Court mentioned in its ruling, there are software programs that can help with calculating rates. Use them — it will make life far more manageable.
6. Self Audit
Bringing an accountant or bookkeeper on board to audit credit card receipts twice a year can be a relatively minimal cost — a few hundred dollars — but it can identify any problems with compliance before back taxes, penalties and interest add up.
It is best to spend a small amount up front to avoid paying a far larger amount later.
7. Come Up With a Plan
Like many things in business, sales tax compliance is best approached with a plan. A sales tax compliance plan should be based on three pillars: One, it should be designed to be easy to implement. Two, it needs to be accurate. Three, it should be as cost-efficient as possible.
It is crucial to avoid practices that put a company at risk for an audit, such as using manual processes or out-of-date rules. Having a written plan that covers compliance requirements, automation, and document retention will allow businesses to remain sales tax complaint regardless of what happens with staff turnover or other business changes.