Last year, the U.S. Supreme Court handed down a big decision for small businesses: In South Dakota v. Wayfair, the Court said that states could require out-of-state, online retailers to collect and remit sales tax on purchases made within the state. Early on, the decision was hailed as an indisputable win for local brick-and-mortar retailers struggling to compete against the Wayfairs and Amazons of the Internet, but did the new ruling actually inspire states to level the sales-tax playing field for small businesses? One year later, the South Dakota v. Wayfair decision has done all that and more.
What was the South Dakota vs. Wayfair decision?
Specifically, the case concerned a South Dakota law that required large, online retailers — those with at least $100,000 in sales or 200 transactions in the state — to collect and remit sales tax on those purchases. The law rebuffed the longstanding legal tradition in which states could only collect sales tax from retailers with a physical presence in the state. In upholding the law, the Supreme Court called the physical presence requirement “flawed” and “arbitrary.”
“Modern e-commerce does not align analytically with a test that relies on [physical presence],” wrote Justice Anthony Kennedy. “This Court should not maintain a rule that ignores … substantial virtual connections to the state.”
What are the effects of South Dakota vs. Wayfair?
With this language, the Supreme Court did at least three important things for local economies and the small businesses that support them: First, the South Dakota v. Wayfair decision officially put a stamp of approval on South Dakota’s law and similar laws already on the books in several states.
According to the Sales Tax Institute, laws imposing sales-tax burdens on online retailers based on some alternative “nexus” to the state have been on the books in states like Idaho, Connecticut and Georgia since as early as 2008, 2011 and 2012, respectively. Under the South Dakota v. Wayfair decision, it seems likely that these laws too would hold up in court. In this way, the Supreme Court validated small businesses’ long campaign for sales-tax fairness.
Second, last year’s decision also ushered in a new era of policymaking. Since the June 2018 decision, more than 40 states have adopted or announced new laws similar to the South Dakota law. These laws require retailers with a certain “economic nexus” to the state to pay sales tax, regardless of their physical location.
For instance, Arkansas will begin using the same nexus outlined in the South Dakota Law. Effective July 1, 2019, the state will require any retailer with at least $100,000 in sales or 200 transactions in the state to remit sales tax. In California, the threshold has been raised to $500,000 in sales, offering even more protection for growing businesses, according to reports in The Sacramento Bee. With these laws, states are not just finding new ways to tax online retailers, they’re also finding the proper balance to strike to protect small businesses along the way.
Finally, the South Dakota v. Wayfair decision appears to have inspired states to look for new ways to boost local economies in the midst of the digital revolution. This year, the city of Chicago for the first time imposed a so-called “Netflix tax” on digital entertainment platforms, including Sony and other streaming services. While not specifically addressed by the Court in last year’s decision, the Netflix tax shows how local communities are better able to experiment with new economic policies following the local-friendly decision.
Are more changes coming for small business?
For small businesses, these policy changes should be just the beginning. Local retailers, brick-and-mortar businesses and Main Street groups can harness the momentum created by the South Dakota v. Wayfair decision to advocate for new local-friendly policies. States have shown that they are willing to level the playing field — and small businesses have a renewed opportunity to show states just how enabled the field remains.