Who Pays A Higher Price For Online Sales Tax?

The 2018 South Dakota v. Wayfair case that allowed states and individual cities to launch tax policies aimed at remote sellers and marketplaces is still reverberating in 2019 and will likely affect online retail in 2020.

In Q3 2019, 14 states started collected online sales tax and 11 more followed in October. The dispute continues over exactly what kinds of companies and activities qualify for new eCommerce sales taxes, and it’s having repercussions for online retail giants.

Online marketplace eBay reported declining sales growth in its third quarter 2019 results, released Wednesday (Oct. 23). Executives attributed the decline to the impact of states’ decisions to tax online sales and projected the change in regulations could cut into sales growth by 2 percentage points next year. The new tax rollout was also blamed for a rise in cart abandonment.

Merchants may struggle with the new tax landscape, as a recent survey of chief financial officers found that 68 percent expressed high or moderate worry regarding tax changes in 2019 — and that 10 percent of that worry stems from the Wayfair ruling.

The latest Next-Gen Sales Tax Tracker explores these issues and whether new rules favor the eBays of the world or small to medium-sized businesses (SMBs).

eBay Makes a Deal

Online marketplace eBay started collecting sales tax for its merchants in 11 states on Oct. 1. The marketplace warned its sellers in advance that they would not be able to opt out of automatic sales tax collection or prevent their items from being sold in affected states, asserting that its policies address legal requirements and that similar laws will likely be put in place in more states in the future.

Don’t cry for eBay, though. The city of San Jose recently offered eBay a revenue-sharing deal that would enrich both entities at the expense of other in-state municipalities. The 15-year agreement enables eBay to pretend that all Californian online sales over its platform were with residents of San Jose, regardless of buyers’ actual locations. The city will give eBay a cut of the platform’s own taxes in exchange, relieving the company from having to handle the administrative work of navigating tax policies and rates.

Amazon Goes on the Defensive

Amazon is also slated to be inundated with new taxes, despite having frequently earned exemptions by promising states investments or local job creation. South Carolina, though, is attempting to retroactively collect taxes from Amazon.

Amazon expressed concern over the potential ruling during a July quarterly report, fearing that the ruling could set a precedent and that “if South Carolina or other states were successfully to seek additional adjustments of a similar nature, [the company] could be subject to significant additional tax liabilities.” Amazon vowed to “vigorously” defend itself.

SMBs May Struggle

A recent survey of U.S. SMB owners found that 20 percent report being “very concerned” about the Wayfair decision, and 29 percent were unaware of it. A majority — 53 percent — thought that managing sales taxes for their businesses was either “somewhat” or “not at all” clear. 

Clearly, the largest online marketplaces will be fine. SMBs, on the other hand, could struggle to comply with eCommerce sales tax laws and may turn to marketplaces for relief. The direct sales are to be tracked and reported by the companies, while in the marketplace model, the Amazon or the eBay is going file and collect taxes on the seller’s behalf, acting as the merchant of record.

Avalara Senior Vice President of Business Development Greg Chapman said in a recent PYMNTS interview that SMBs with just a few employees might not have any staff to spare to help navigate new tax obligations. “The more these eCommerce platforms can make tax simple and have it built in and have an easy ‘click and submit’ process, the more attractive they may become to smaller merchants. As a result, we’re seeing the trend toward these bigger platforms building robust tax functionality,” he said.

In an interview with PYMNTS, National Retail Federation Vice President of Government Relations and Tax Counsel Rachelle Bernstein said compliance hasn’t been a huge change for very large retailers, especially since they had already been collecting in most states prior to the Wayfair ruling and already have tax compliance software.

“Regional retailers with presences in one area of the country that may have been selling into other areas, and small retailers that may be only in one or two states and have websites for selling into other states obviously face a change,” she said.