To Tax or Not to Tax…The Supreme Court’s Internet Sales Tax Ruling

By Ryan Mack

Last year for the Holiday Season, did you shop online, go into store, or a little of both? Check out these stats for the 2016 Holiday Season:

·     According to the 10th Annual Accenture Holiday Shopping Survey 84% of consumers planned to check on Amazon.com before buying elsewhere.

·     76% of Americans planned to use their mobile devices for holiday shopping  (from American Express Spending & Saving Tracker)

Online sales have changed the industry for the Holiday Season and the way retail does business all year round. If you have a mobile phone, a computer, and a connection to the Internet you can also have a business. I have stated many times you can open your own t-shirt design shop tomorrow by simply going to cafepress.com, click on the design your own section, and there you go…you are a t-shirt print and design business owner!

Many consumers are taking advantage of this online craze, including my mother whom I personally see getting a package delivered to her home just about every time I visit (Do your parents shop that much? Sorry for “putting you on blast” Ma!). Consumers love the convenience of being able to purchase from the comfort of their own homes and new/small businesses love being able to sell this convenience to consumers. However, many brick-and-mortar retailers have seen their businesses hurt by this e-commerce movement.  But on Thursday, June 21st. the brick-and-mortar businesses got some relief from the Supreme Court. 

After a South Dakota lawsuit filed against Wayfair, Overstock.com, and Newegg regarding state tax collection, Thursday’s ruling overturned a prior court decision in 1992 that gave a sales tax advantage to online retailers.  This ruling effectively changed the landscape of online shopping by freeing state governments to compel retailers beyond their borders to collect sales-tax revenue from consumers. For years, avoiding sales tax was an enormous perk for online shoppers; this 5-4 decision changes this for American consumers, online businesses, brick-and-mortar businesses, and states almost immediately. 

Let’s look at the winners and losers of this decision and how we should prepare for the changes:

US States – Winners: Previously the states could only require a company with a physical presence in their state to collect sales taxes. This means that your state, depending upon population size, will now be able to collect anywhere from an additional $8 billion to $35 billion in tax revenue every year. 

Brick-and-Mortar Businesses – Winners: These businesses have already been collecting sales taxes, but now their online competitors will have to as well. To them, this is a much welcomed leveling of the playing field.

Large Online Retailers – Losers: For years these businesses have been dodging collecting taxes. Those days are behind us as they too must now start to collect sales taxes effectively making their products just a tad more pricey for consumers.

Online Shoppers – Losers: The perk of shopping online to avoid sales taxes has ended. This may not seem like a lot when you are shopping for coffee beans, but when you are shopping for that brand new television, expensive handmade jewelry, or that leather jacket…a completely different story!

Financial Tip for Online Shoppers: Making it easier to shop also makes it easier to break your budget and your bank account. Online shopping addiction is very real especially if it doesn’t “feel” like you are spending “real money”. Just a few clicks and a few days later a package ends up at your door…picture that! Be careful to follow your budget while shopping online. If you feel you are an online addict, perhaps you should set up a separate account at your bank account…only keep in this account what you have budgeted to spend. 

Small Online Businesses – Big Losers: They are the biggest losers here because many of the smaller businesses are just one person shops without the size, manpower, or the revenue of the larger businesses with sophisticated accounting departments. Not only will they have to collect taxes, just like the larger online businesses, but many of these small businesses are ill prepared to be compliant with the requirements of more than 10,000 taxing jurisdictions across the country. Think about it…you are a small business owner in Iowa who sells handmade jewelry across the country- what is the proper amount of sales tax you must collect from the necklace sale you made in Florida?

3 Financial Tips for Small Businesses:

1.    Invest In Good Business Software – The days of keeping receipts in a shoebox must end! I suggest Quicken or Quickbooks. If you aren’t used to using this software it can seem a bit daunting at first, but once you develop a habit of using it, it will make your life easier!

2.    Hire a Good CPA – Getting someone reputable for your business should be included in your business budget. This person should be an Enrolled Agent, a Tax Attorney, or a CPA. Get some referrals and get to know this individual before you commit. Just because he/she has worked with your friend previously doesn’t mean you will click. 

3.    Employ Family Members to Work for Your Company – Paying your spouse will allow you to nearly double the money you can put into your retirement accounts and could have some tremendous tax benefits. Hiring your children, who just might be in a lower tax bracket, can reduce the overall tax burden for the family AND provide a great opportunity to teach your children the value of a dollar.

HAPPY SHOPPING!

Ryan Mack is the President of Optimum Capital Management, LLC and the Director of Financial Education for Mobility Capital Finance. Mobility Capital Finance (“MoCaFi”) is a company on a mission to provide underserved Americans access to healthier financial products. Our strategy takes advantage of several important macro-trends including 1) most people have a smartphone 2) more and more financial transactions are being done on mobile devices which means that you, the banking consumer, can now complete banking transactions on your mobile device 3) bank branches are closing at record rates, especially in undeserved neighborhoods and soon you may not have the convenience of going to a nearby neighborhood bank 4) MoCaFi’s responsible and secure use of data and analytics allows us to offer you personalized financial products (i.e. a pre-paid debit card that allows you to increase your credit score by paying your rent). MoCaFi can change the trajectory of families’ lives. Visit our web page to see how we can help you. (www.mocafi.com)