By now, you’ve likely heard about the Supreme Court’s ruling in South Dakota v. Wayfair, Inc.—especially if you own or operate a business. If you’re unsure of what I’m talking about, let me break it down for you.
On June 21, 2018, the Supreme Court of United States ruled in a 5-4 decision in favor of South Dakota in a case dealing with online retailers and how they handle the collection of sales tax. Within this decision, the Supreme Court stated that online retailers can indeed be required to collect state sales taxes from consumers even if they have no physical presence within in the state.
Wait…online retailers weren’t collecting sales tax?
It’s a little more complicated than that. Online retailers were collecting sales tax in the states where they had a physical presence—like an office, warehouse, employee, or distribution center—but not in others. Why? Because in 1992, the Supreme Court decision in Quill Corporation v. North Dakota effectively prevented states from having to collect sales tax from retail purchases made out-of-state unless the seller had a physical presence in the state where the purchase was made. Quill Corporation v. North Dakota set a precedent moving forward—unless your corporation or business was physically located in the state where your sales were being made, you did not need to collect sales tax in that state.
Why South Dakota v. Wayfair, Inc. Overturned The Precedent
Quill Corporation v. North Dakota was decided in 1992 long before the new age of the Internet and e-commerce. In the fourth quarter of 2017, e-commerce accounted for 9.1 percent of total retail sales in the United States, which was almost double the percent from seven years earlier in 2010. Online shopping and Internet sales are on a much larger scale than the court in 1992 ever dreamed they could be—so, in a way, the decision in South Dakota v. Wayfair, Inc. was a much-needed clarification of how to collect taxes in the new age of online sales.
Purcado & South Dakota v. Wayfair, Inc.: How Affiliate Marketers Will Be Affected By This Decision
Purcado is an affiliate marketer. We partner with 100+ retailers to bring our users the best price on the web—and we do so via affiliate marketing. Much like Amazon is an avenue for third-party sellers to reach an audience or a blogger is a platform for reaching a specific niche, Purcado is simply a publisher that directs consumers to specific products. We aggregate products from a vast number of retail sites and present them to consumers in a more appealing way. In our case, we aggregate by price so customers can easily compare prices among different retailers. However, we do not partake in direct sales of the products; our site simply refers customers to a retailer to purchase.
So, will this decision affect us and other affiliate marketers? Yes, in a big way.
Brief History of Affiliate Marketing & Nexus Laws
Ten years ago, in 2008, states began to challenge the decision in Quill Corporation v. North Dakota. Saying that affiliate marketers (bloggers, aggregators, and online influencers that refer consumers to specific retail sites) had a connection to corporations, states argued that by having an affiliate in a state meant a business had nexus in the state.
Increasingly, states began to pass Click-through Nexus laws. In basic terms, these laws say that online retailers who work with online affiliates residing in states where they receive revenue have nexus in those states. Why? Because the online affiliate creates a physical presence. Thus, the online retailer is required to collect taxes in those states.
Click-through Nexus laws affected potential affiliate partners by limiting the growth of their affiliate marketing networks. Why? Because not all states passed Click-through Nexus laws—and corporations outside of Nexus states did not want to work with affiliates in Nexus states because they would then be subject to sales tax collection where they would otherwise be deemed excusable.
Click-through Nexus & South Dakota v. Wayfair, Inc.
After the decision in South Dakota v. Wayfair, Inc., Click-through Nexus laws will likely be enacted in all states that have a set sales tax or Congress will move to enact a piece of legislation that clarifies when and how to collect sales tax. In other words, economic nexus could soon be the new norm.
For affiliates, bloggers, and influencers, this is good news. At Purcado, we use affiliate marketing tactics to aggregate content from multiple retailers. In order to better our service for our users, we need a plethora of online retailers to work with us. Previously, being from a Nexus state barred Purcado from working with some retailers—and kept our service from including a few key players. Now, after the South Dakota v. Wayfair, Inc. decision, Purcado has the chance to reach out to these retailers again and will likely be more successful in forming partnerships with them. All in all, this decision will help our Internet startup (and others like us) to be more successful in creating the service our users want to see.
“The South Dakota v. Wayfair, Inc. ruling is extremely beneficial to Purcado,” says Purcado CEO, Jeff Caudill. “During our company’s first few years, we have struggled in getting certain retailers to agree to work with us due to Purcado being located within a Nexus state. This ruling should help level the playing field and remove the obstacles preventing us from working with all retailers. Any company or blog working within the affiliate marketing space should be able to take advantage of the new laws.”
How South Dakota v. Wayfair, Inc. Will Affect Others
Now that the physical presence standard is null, states can legally collect sales tax revenue from any online retailer that has transactions run through their state—even if their business is not physically present in the state. While some states have specific legislation that gives more detail on what types of businesses need to pay their taxes, others do not. As we mentioned earlier, individual states or Congress will likely move to enact a piece of legislation that clarifies the issue. Until then, here is what we know about how the decision in South Dakota v. Wayfair, Inc. will affect you—based on the size of your business.
Large E-Commerce Brands
Did you know that, as a consumer, you already pay sales tax when you purchase online from retailers like Walmart, Amazon, or Target? Large online retailers—like Amazon and Walmart—likely won’t be affected by this decision because they already had a physical presence in most states. Amazon, for example, has 140 fulfillment centers scattered across the United States—which means they had a physical presence in almost all states that collect sales tax and were required to collect the sales tax long before this ruling came down from the Supreme Court.
Small E-Commerce Sites & Etsy Shops
Small online retailers, however, will see significant changes in how they collect and file taxes. If Congress doesn’t step up to clarify the ruling from South Dakota v. Wayfair, Inc., it could be a confusing time for smaller e-commerce sites and Etsy shop owners. State law makes it clear in South Dakota—if your business sells more than $100,000 or has 200+ separate transactions for the delivery of goods into the state, then your business must collect sales tax from your customers. However, many other states have not yet passed laws to clarify this issue. For small retailers, it may be a waiting game to determine the best practice for collecting and filing sales tax. Unlike large corporations which can invest in resources to keep up with tax obligations across states, it’s a much bigger challenge for small companies because they are likely unfamiliar with how to operate in multiple markets. Future state and federal legislation on the issue will help to protect small business owners with an online presence.
Most internet startups will not be affected unless they plan to incorporate an e-commerce aspect into their website or startup idea. E-commerce startups will need to stay current on tax laws across state lines. Research and compliance with all state tax laws and codes for the states with which they do business will be required moving forward.
Bloggers & Affiliate Marketers
As we mentioned before, bloggers and affiliate marketers (or individuals who promote products for specific retailers via affiliate marketing channels) may have already begun experiencing changes in state tax law to include online sales in the form of Click-through Nexus legislation.
While bloggers and affiliate marketers are not liable for collecting and filing sale taxes in any business capacity (that’s up to the remote sellers and retailers they partner with), they may actually experience positive effects from the decision in South Dakota v. Wayfair, Inc. Now, the playing field has been leveled and retailers who previously refused to work with affiliates in certain Nexus states can do so without the fear of additional taxation.
Brick & Mortar Stores
Brick and mortar stores should be rejoicing over the decision. The decision in South Dakota v. Wayfair, Inc. is likely to put local businesses—especially brick and mortar storefronts—on a more level playing field with online retailers, as sales tax will now be collected on all in-store and online purchases.
States are especially going to benefit from the decision in South Dakota v. Wayfair, Inc. In 2017, states could have collected anywhere from $8 billion to $13 billion in sales tax from remote, online sellers—but lost out due to the 25-year-old court opinion in Quill Corporation v. North Dakota. Now, states will have the opportunity to collect sales tax revenue from online businesses moving forward.
How to Find Out More About The Nexus Decision
Whether you’re a small e-commerce site, an Etsy shop, an affiliate, or a blogger, you should contact your local tax or legal expert to ensure you are in compliance with all relevant state tax provisions moving forward. As legislation continues to pass in various states, make sure you stay up to date on the latest news to ensure you are properly following code.