If you were watching the news this week you’re probably already aware of the Supreme Courts reversal regarding their initial 1992 decision NOT to allow states to collect sales tax from out of state buyers. Unfortunately for Internet buyers and sellers, that’s about to change. In a nutshell, going forward it will be up to the individual states to decide it they want to collect sales tax from out of state purchasers.
An example is a what’s being proposed in South Dakota. “Notably, the South Dakota law that kicked off the debate put in a $100,000 annual sales threshold, or in the absence of that, a 200 in-state transaction limit.” So let’s assume you’re a small knife seller in South Dakota with $99,999 in annual sales. As long as you’re making less then 200 ‘in state’ sales a year, you’ll be exempt from having to collect South Dakota sales tax from online buyers. The bad news is $100,000 in gross or 200 sales in state would mean you’ve got a pretty small operation and most likely not making a living at whatever your doing.
A major difficulty I foresee is how/who calculates the sales tax. In Minnesota, there are state sales taxes, municipal taxes and special taxes. Clothing, food and drugs aren’t taxed. If your lucky enough to live in one of the states without a sales tax, Delaware, Montana, Oregon, and New Hampshire. (A fifth, Alaska, has no state-level sales tax but allows municipalities to impose the retail-level tax.) The other 4 states may also have the ability to charge local sales taxes. But if you live in Montana for example and purchase a knife from Minnesota, you’re going to have to cough up an additional 6.78% in Minnesota Sales tax. But my read is that living in Minnesota, if I buy a knife from a Montana internet retailer, I don’t pay tax.
It’s also going to be interesting to see what the individual states do with international sales. Most of you overseas are already getting screwed royally with exchange rates, shipping and import taxes. To think the individual states would consider also charging you the prevailing state sales tax is a bit sickening.
Obviously, it’s going to take a while for all of this to get shook out. Each state will have to decide what they want to do with this law but I can’t imagine there will be a single one that won’t be out there with their hand out. Without a doubt it’s going to have a major impact on retail internet sales. There could be a major advantage to relocating an internet business to one of the 5 states without state sales taxes.
I know the states are excited about the potential additional revenue stream and a part of me understands that. There have been discussions on the radio how this additional revenue will help take the strain off from state budgets and bring a level playing field to the brick and mortar businesses. What I haven’t heard is much discussion regarding what the impact could be on smaller, niche market retailers that sell solely on the web. Often their products aren’t even found in traditional brick and mortar stores. It’s going to be interesting to see how it all shakes out. I’m not optimistic.