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United States / Analyst Insights
E-commerce State Analysis: New Regulations

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by Robert Miles Analyst
Oct 05 2018

With the Supreme Court decision in South Dakota v. Wayfair Inc. on June 21, new issues have been raised for operations with e-commerce sales. The standard prior to this decision gave states tax authority based on physical presence. This legal standard was set in the 1967 National Bellas Hess v. Illinois, and reaffirmed with the Quill Corp v. North Dakota case in 1992. Prior to the new ruling, there were 31 states that were able to work around the Quill ruling with complex legislation and minimal definitions of physical presence. According to the Tax Foundation, nearly half of all of e-commerce sales were subject to state sales taxes. This taxation has done little to limit the growth of e-commerce.


The potential effects of new state tax regulations will likely result in a greater share of total e-commerce being taxed. However, this is not expected to stop the growth of e-commerce. The new standard is to not materially inhibit interstate commerce, rather than proving physical location. The Tax Foundation lists six key features from North Dakota’s tax law that help reduce the burden on interstate commerce, “a safe harbor excluding those who sell only limited amounts in South Dakota; no retroactive tax collection; single, state-level administration of sales taxes; a simplified tax rate structure; uniform definitions and other rules; and access to software provided by the state, with immunity for those who rely on it.” States do not necessarily have to follow this standard, but the ruling was made with the intention of guiding future tax laws. So, in order to avoid further legal contests states are expected to follow the North Dakota standards.


The regulations will likely focus on companies that generate more than $100,000 in e-commerce sales, so it will likely not hurt microbusiness. However, states with a high concentration of e-commerce-driven companies should take notice. States may not have control over how other states tax sales, but they should be aware that increased taxation will restrict the performance of e-commerce companies. The growth of e-commerce sales has not occurred solely because of tax loopholes. Technology change that has increased efficiency of online purchases and the convenience of buying online have had more to do with this growth.


E-commerce companies have been strong performers over the last 20 years. On average, online retailers have been able to increase their revenue per establishment. This indicates that these operations have effectively scaled and are more than simply adding more small locations. A significant percentage of companies have some form of e-commerce presence and a growing number perform their business solely online.


Importantly, companies that have some level of e-commerce presence, tend to have a much higher employee count. So, a greater share of state-level employment is accounted for by these companies. Despite this trend, in instances where the operations are primarily generating revenue through e-commerce, the employee-per-enterprise figure drops back down. While a significant portion of large companies has some e-commerce operations, companies that predominantly use online sales channels tend to require fewer employees. This leads to several different possible outcomes for increased online sales taxes. While operators that predominantly sell online have a greater share of their revenue at stake, their online focus means that they can more efficiently allocate resources to complying with different tax laws. Conversely, operators that simply use e-commerce as a secondary sales channel may not be able to effectively dedicate resources to the new laws. This has the potential to dissuade these operators from using the highly lucrative e-commerce sales channel.