South Dakota v. Wayfair, Technology, and Your Business
If you sell goods or services online, you may have heard of the Supreme Court case South Dakota v. Wayfair, Inc. In this post, I'll discuss the impact of this case on online goods and service providers from a technological perspective, and solutions I have helped implement for Hashrocket's clients.
South Dakota v. Wayfair, Inc. was a Supreme Court case decided in June 2018 that impacts many businesses. I learned a lot about it recently and it's pretty fascinating. This summary on Oyez provides a nice primer; here's the summary:
A state may require sellers with no physical presence in the state to collect and remit sales tax for goods sold within the state.
A practical example: if I sell a React.js course online, and somebody purchases it in a state like Hawaii where sales tax applies, I may be required to collect Hawaii sales tax on that sale. This upends a lot of assumptions about e-commerce, and businesses are scrambling to understand their exposure.
Here is my description of the problem, followed by a solution I've helped implement. Also, a quick disclaimer: any technical solution should be paired with counsel from a tax professional.
This ruling sounds simple, but the challenges it presents can be surprisingly complex. Here are a few:
Not every state collects sales tax. Of the states that do, some collect sales tax for certain classes of goods and services, but not others. Is your team ready to learn the intricacies of these rules for every US state, territory, county, and city?
Governments love sales tax, and they are currently racing to pass laws that give them a bigger piece of the pie. Can your team remain conversant on these ever-changing laws?
Do you sell enough items in a jurisdiction to qualify for taxation? Many states are creating thresholds to determine who needs to collect tax. If you don't sell enough, you don't have to collect sales tax. Do you have a system in place to track your sales by jurisdiction, and notify your team members when you have crossed these moveable thresholds?
Do you collect payments through more than one provider? Some providers make it easy to attach taxes to the different types of things you sell, others do not. The likelihood of an off-the-shelf integration existing between any specific tax solution and every payment provider you use is low.
Are any of your customers tax-exempt? Are they the correct class of exemption to be exempt from taxes on the type of thing you sell, in the state they are purchasing from? Religious organizations, charitable organizations, and the federal government are just a few classes you'll need to consider.
How would you roll out such a feature to existing customers? Do you have valid data to determine how a customer should be taxed? How do you manage that rollout from a technical and UX perspective?
Whew! These are non-trivial challenges. Their solutions must be tailored to your business and deployed with precision. The cost of inaction, or failure, is high. Jurisdictions can levy penalties and interest for businesses that aren't in compliance.
My team at Hashrocket has solved these problems before, and we can solve them for you. I'd break our solution into a several major steps: choosing a provider, backfill, historical data analysis, applying taxes to future purchases, and rollout.
One of the most crucial early steps is picking the right tax solutions provider. There are several in the marketplace, and each has its own tradeoffs. Part of our consulting practice at Hashrocket is acting as a CTO and helping you evaluate service providers for the right mix of features. Picking the right tool matters.
Next, we need to figure which taxes to apply to your existing customers. The data we need, and the data you have, are brought closer together with a technique we call a backfill. Backfilling your customer's billable information may be a big chore. Why? Online goods and service providers don't always think about sales taxes and collect data accordingly when they launch their business. We have a variety of techniques to transparently nudge users to give us their billable addresses. We can't charge the sales tax unless we know where the customer is purchasing from, and given the proliferation of stay-at-home businesses, businesses without a billing address, businesses with headquarters in multiple states, etc., there isn't one simple way to guess this information. Once we have the data, we need to validate it to ensure that we can apply sales taxes to the addresses the customer has provided. What constitutes a good, or good enough, address?
Another service we provide is expert-level SQL database analysis to compare historical sales against state thresholds. You may already be selling enough to have a tax liability! Use this knowledge to empower your team to plan and communicate effectively with the government.
Next, we figure out which taxes might apply to future sales, and apply them. We can build custom solutions in a variety of backend languages (Ruby, Elixir, etc.) to analyze your sales in real-time and properly determine taxation. We then can take this information and apply it to each of your payment providers (Stripe, PayPal, etc.), ensuring that the right taxes apply no matter how your customers pay.
Finally, we are precise about how we roll out a feature like this. Existing customers who have never been charged sales tax before must be informed that their bill is going to go up. This isn't news they're going to like, so delivering it effectively and preemptively answering their questions is worth the effort. We might advocate rolling out the feature in stages, testing on existing or new users, logging and triaging issues, and responding to feedback. Additionally, our rigorous TDD methodology catches and permanently fixes many issues before ever affecting a user. Getting this right helps us implement tax solutions that work and customers appreciate.
South Dakota v. Wayfair has shaken up many e-commerce business plans. Waiting on an off-the-shelf solution to this problem for your business could be costly. This is when a consultancy like Hashrocket shines: we come in with expertise honed on other projects and apply that expertise immediately to your problem with little overhead. Contact us today and let's talk about South Dakota v. Wayfair and your business.
Photo by Scott Graham on Unsplash