Consultants in demand as Supreme Court rules on online sales tax

02 July 2018 3 min. read

In what has been lauded as a victory for Main Street, the Supreme Court has ruled that states have the power to force online retailers to collect sales taxes. The dramatic reversal of a 1992 ruling has seen consulting firms release public statements and prepare white papers to help clients in online retail navigate the new tax landscape.

In South Dakota v Wayfair the Supreme Court delivered a huge blow to online retailers who have enjoyed a significant tax advantage over brick-and-mortar rivals for decades. In a 5-4 ruling written by departing Justice Anthony Kennedy, the court reversed a landmark 1992 precedent that made ‘physical presence’ a requirement for states to collect local sales taxes from retailers.

Hailed by President Trump as a “great victory for consumers and retailers”, the decision means e-commerce companies may be about to cough up an extra $13 billion in state taxes each year. Around half of the products sold by Amazon, for instance, are punted by third-party vendors from whom no sales tax is collected. Shares in the firm fell by 1.1% overnight after the justices’ ruling.

The decision only has immediate impact in South Dakota, which enacted the ‘economic nexus’ as opposed to ‘physical presence’ test in a law that targets online retailers with revenues exceeding $100,000 in the state. Dozens of other US states have similar legislation which is almost certain to come into effect. States where no such provisions are made are widely expected to draft legislation soon, rather than missing out on billions in tax revenue.

Consumers will face higher prices as Amazon and the like compensate for their loss. But e-commerce firms can expect change on a monumental scale as their tax obligations enter uncharted territory and vary considerably across states. Consulting firms have already released statements on the ruling, anticipating a raft of tax advisory queries from clients in the retail game.

Consultants in demand as Supreme Court rules on online sales tax

"Today's Supreme Court decision in South Dakota v. Wayfair could turn out to be almost as significant for American businesses as the recent rewrite of the U.S. federal tax code," said Jeffrey C. LeSage, Americas Vice Chairman of the Tax practice at KPMG. "It's a decision that reflects the realities of an increasingly digital global economy."

"The impact of the Court's ruling on companies in terms of time, technology, and expense is likely going to be substantial. Businesses will now need to prepare to closely examine and retrofit their operations to determine where they have to collect tax, whether their goods are taxable, and how they are going to handle the new tax computation, filing, and remittance obligations."

Chicago-headquartered BDO USA, a tax, accounting, and consulting firm, has published a full breakdown of the case and its implications for retailers. Describing Wayfair as a “watershed moment in state taxation”, the firm argues that its consequences will extend beyond retailers and consumers, to force a major overhaul in the tax architecture of state and local governments.

RSM US, the US member of RSM’s global network of accounting and consulting firms, anticipated the potential impact of the pending case, writing a comprehensive white paper on its implications in January. Since the decision, the firm has held webcasts for clients and other interested parties eager to find out where they stand.

Deloitte also conducted an early analysis of the potential implications of a Supreme Court reversal, advising clients in February to get their tax affairs in order. After the ruling Valerie Dickson, partner at Deloitte Tax LLP, released the following statement:

"This is a landmark ruling that will have a significant impact on online businesses of all sizes. Companies engaged in e-commerce may have to revise their business models, their IT systems, and their internal processes for calculating their tax obligations. One key question is whether they have the required customer data to determine how to properly source sales."