Today the Supreme Court handed down its decision in South Dakota v. Wayfair. In its ruling the Court removed the fifty-year barrier to tax known as the physical presence rule. Under this rule, no state could subject a business to its tax regime, including the imposition of a sales and use tax collection obligation, unless that business had some form of physical presence in that state.

By eliminating the bright line physical presence rule, The Court has opened the door for states to unfairly impose their highly complex tax laws on the smallest of businesses, including the kitchen table enterprises that sell on platforms like Amazon and Ebay. Many Amazon sellers already know this pain, as states have been aggressively pursuing them for back taxes since inventory they “own” had been placed in Amazon warehouses all over the country. For those who do not sell on FBA, this case serves as your wake-up call, as you are now in the same nightmare that the FBA sellers have been in for some time.


The Cost of Compliance


However, before you rush and register in every state there are some things that you should consider. The first one being whether you can afford it. The cost of state tax compliance can be tens of thousands of dollars per year for the non-fba seller. For those that use FBA your tax compliance could easily run well into the six figures. This is because FBA merchants will be considered to have an income nexus as well, due to their inventory being stored in Amazon warehouses.

There are a lot of problems with states placing this type of a burden on small sellers, especially those that sell on platforms like Amazon, Ebay, Etsy and Walmart, where the most practical solution from a sales tax perspective would be for the marketplace to collect. Washington and Pennsylvania have already passed such laws. However, even in Washington you are still required to file a Sales Tax Return to pay your Business and Occupation Tax (B&O), which still leaves you with the compliance burden. Likewise, if you are a PA FBA seller, you will also be expected to file PA income tax returns.

So, what happens next? If we do nothing, most online sellers will find it too difficult to exist. Being an online business online will simply become cost prohibitive. The cost of tax compliance from tax alone will eat away at merchants profitability to the point where it will no longer be feasible to continue being an online business. Nor will it be feasible for the future entrepreneurs of the world to start a new online business.


What, if Anything, can be done?


Yes! We can band together and fight back. The outcome of this case will surely embolden states to aggressively pursue sellers for back taxes, and to force them into compliance going forward. The question is, and always was, is it Constitutional? Nothing in the Court’s decision today changed what we’ve been saying from day one about whether it is constitutional to impose these tax burdens on marketplace merchants. The Court’s repeal of physical presence is just that, a repeal of physical presence, nothing else changed. Physical presence is no longer a consideration when determining whether a state can tax you. The situation has become much greyer, with the Court acknowledging that small businesses can still bring a case arguing that the burden is too destructive; something the Court specifically decided not to address but recognized that this could still be an issue.


The Online Merchant Call to Action


The key here is to band together. Defending a tax matter against a state can cost a seller hundreds of thousands of dollars. That’s a lot of money to assert your constitutional rights. As an organization representing the interests of all online sellers, we can bring that case on your behalf, and on behalf of every other online seller in our community. This way we only have to fight one fight, and no single merchant will have to take on the burden of this fight alone. But none of that is possible if you don’t join the fight. Join the Online Merchants Guild today, and help guard the future of ecommerce.