A momentous United States Supreme Court decision is paving the way for widespread state-by-state US tax law changes and could end up having ramifications for local Aussie businesses, big and small.
The South Dakota v. Wayfair, Inc. case was heard in the US Supreme Court this year, with the US state of South Dakota going against large American e-commerce store Wayfair in the culmination of years-long debate over taxation for online retailing.
Without getting into the nitty-gritty, the 5–4 ruling from the Supreme Court in favour of South Dakota overturns a ruling from 1992, Quill Corp. v. North Dakota. This decision, issued at the dawn of online retailing, ruled that US states could not collect sales tax (similar to GST) on purchases made by their residents from out-of-state companies or vendors.
Essentially, if you were a citizen of North Dakota and bought a computer from Amazon, the company would not be required to pay tax, passing the onus onto the citizen to report and record their sales tax. However, just 1–2% of citizens reportedly did so.
“The problem was, consumers don’t record it and the business don’t need to pay it, so the states miss out on both sides,” James Meli, tax practice leader at LegalVision, told SmartCompany.
“They can’t go after the retailer because they have no physical presence, and they don’t have enough data to go after the individuals.”
Understandably, this began to upset the states, with the US Government Accounting Office estimating that in 2017, US states were missing out on $US13 billion in taxes each year due to this ruling.
So, following a comment from Supreme Court Justice Anthony Kennedy in 2015, which indicated it was time to reconsider the Quill decision, over 20 states filed legislation seeking to repeal the decision — with full knowledge it would be challenged constitutionally. Businesses began to challenge the new laws, leading to cases such as South Dakota v. Wayfair.
And in late June, the Supreme Court handed down its decision in the Wayfair case, ruling the previous legislation established in Quill was overturned by the new decision, and that US states could now impose sales tax on online retailers, even if they were not physically located in the state.
The Quill rule was ultimately rejected as “unsound and incorrect”, with Kennedy saying that, in his opinion, “the internet’s prevalence and power have changed the dynamics of the national economy”.
Cost comes as compliance for SMEs
While this poses a headache for the Amazons and eBays of the world, consequences will also be felt by international businesses that sell physical products to consumers in US states.
Meli warns local Aussie businesses, whether big or small, will need to keep an eye on each states’ legislation, although he predicts there will be a number of thresholds put in place to stop the new laws adversely affecting small businesses.
“In South Dakota’s case there’s a $100,000 threshold, and if your sales are below that you’re okay,” he says.
“They’re targeting big e-commerce retailers, like Amazon, but the problem is each of the 50 states will have individual legislation with individual thresholds.”
Costs to business could be somewhat significant depending on the level of sales, says Meli, but the majority of the cost would be in the necessity for compliance and tax tracking for SMEs.
Meli believes each state will likely set similar thresholds, and doubts many Australian SMEs would exceed them. However, he advises SMEs to keep an eye on the legislation being introduced in any relevant state, if it hasn’t been already.