The Supreme Court’s recent ruling that states can begin collecting sales tax on all online purchases has the potential to curtail the competitive advantage that e-commerce businesses enjoy.
For the majority of the Internet age, online businesses without a physical presence in a sales tax state were not required to collect that tax—it’s one of the reasons why Internet purchases seemed to be cheaper.
But with the new ruling, it’s likely that most—if not all—45 states that currently assess a sales tax will find an additional Internet sales tax extremely tempting:
- It will create a substantial stream of revenue at a time when state and local governments are experiencing severe budget problems.
- It’s simple: The retailers do all the charging, collecting, and remitting work.
- It removes what many in-state businesses consider an unfair advantage to out-of-state retailers.
Here’s what you need to know to prepare your business for this sea change in retail.
If You’re a Brick-and-Mortar Business:
Brick-and-mortar businesses hoping to benefit from a more level playing field should not set expectations too high. You may see more sales, but don’t over-rely on the advantage if your customer base uses online retailers for other reasons, such as convenience.
A better tack may be expanding into e-commerce: After all, with the new ruling you’ll be dealing with a less competitive environment in a trending sales channel. Online sales now account for approximately 10% of total retail sales, according to Statista—and the figure is rising.
If You’re an E-Commerce Business:
E-commerce businesses that fear a reduction in sales thanks to the new tax would do well to remember all the potential advantages that remain: Yes, consumers will perhaps pay a bit more in tax at the end of a given transaction. But that does not eradicate the ease, speed, and access to a diverse array of products they enjoy while shopping online or the convenience of having those purchases delivered directly to their door.
If a retailer’s customer base is concentrated in certain geographical locations, it may make sense for e-commerce firms to open a brick-and-mortar location—or even a modest pop-up to boost immediate purchases.
Keep in mind that online businesses will likely maintain a price advantage and there’s a cost to maintain a physical presence—expenses that won’t necessarily shrink if sales drop. Fewer locations mean less overhead. So proceed with caution.
How Financial Operations May Change for E-Commerce
Small businesses with sales in only one or a few states could conceivably handle the additional work of changing billing processes and filing sales tax paperwork with existing personnel.
However, businesses that sell in numerous states—particularly those which have additional city, county and/or district taxes such as Ohio, California, and Texas—may need to hire additional people to undertake the charging, collecting, reporting and remittance of the tax or otherwise outsource that work.
Preparation, naturally, is key: Company accountants will need to figure out how to change billing processes as well as whether new software is required to comply with the necessary tax laws. Leverage your partnerships to determine how best to approach the new requirements from an operational perspective.
Accountants and financial personnel can begin by identifying the type of products or services the company sells, the states in which its customers are located, and which goods and services are taxable in those states.
Generally, any tangible personal property is subject to sales tax. Services typically aren’t taxable unless a state enacts a law that specifically declares otherwise (Ohio’s tax on payments to access database information, for example).
Once all of this is established, you’ll have a better idea of what changes are necessary in billing processes, whether new software is required, and how sales taxes can be reported and remitted.
Financial forecasts may have to be reduced if sales decline as a result of the new taxes. Working capital, on the other hand, shouldn’t be affected.
While it’s ultimately the consumers who pay the sales tax, it’s the business’s responsibility to collect it. So consumers who enjoy the benefits of online shopping will now—depending on where they live—have to pay between 5 and 11% more for it. E-commerce businesses, meanwhile, face the operational and financial effects of updating their processes.