The New Online Tax Ruling and How It Affects Your Small Business

In a historic ruling, the Supreme Court of the United States will allow states to impose their sales tax on out-of-state businesses. The ruling overturns a 1992 precedent that prevented states from imposing sales tax on businesses with no physical presence in the state in question.

Although the Supreme Court specifically ruled in a case presented by South Dakota, it’s highly likely that other states will follow suit and levy their sales tax on out-of-state businesses.

South Dakota’s sales tax requires businesses with over 200 transactions or $100k in revenue generated in the state to collect the tax from their customers, regardless of whether they’re physically present in the state or not.

Other states that don’t impose such rules are likely to adopt similar new laws, since it may be a huge asset for their budget (South Dakota expects up to $50 million additional revenue from the newly imposed sales tax).

How Does This Affect Your Business?

Unless your business is registered in South Dakota or you’re ordering supplies from a company in South Dakota online, your business won’t immediately be affected. That’s because, as mentioned above, other states have to pass the appropriate laws that enables them to collect sales taxes from out-of-state businesses.

What those laws are going to look like, and how this will all work in practice remains to be seen.

Online Shopping Is the Biggest Loser

The ruling mostly affects businesses and customers active in online shopping. It means that if a customer from South Dakota orders a product from your shop (and you’ve already reached the threshold of 200 transactions or $100k in revenue), you’ll be required to charge your customer the appropriate South Dakota sales tax.

This poses difficulties for your business, since you’re required to install infrastructure (mostly software and paperwork) that enables you to collect the out-of-state tax and send it to the appropriate authorities.

The additional work raises your operating costs, not to mention the fact that you have to increase your prices (unless you want to cover the tax out-of-pocket). And we all know what an increase in price may mean for businesses: customers jumping ship.

Streamlined Tax Agreement

If your business is located in one of the 24 states that are members of the Streamlined Sales Tax Agreement, you’ll be able to simplify your sales tax procedures and lower your associated costs.

Check out if your business is eligible to participate in the agreement.

Brick-and-Mortar Shops Win

On the other hand, brick-and-mortar shops that already charge their state’s sales tax on their customers may see an increase in business. If that’s the case with your company, then you’re in luck.

Previously, your physical business had to compete with out-of-state retailers that operated in states with lower or no sales tax. This allowed them to lower their prices to a point where customers preferred to choose their cheaper out-of-state products over yours.

Now, this is over. Your online competitors will have to levy your state’s sales tax on top of theirs (if applicable), which may make their products a lot more expensive. Customers won’t see any reason to buy from their shop instead of yours.

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This content was originally published on the Veem blog. Check it out for more information and exclusive articles.