Taxes and tariffs throw online processors for a loop

The Supreme Court is tossing a wrench into online payment processing at a time when tariffs are already threatening popular cross-border e-commerce and online marketplaces.

In South Dakota vs. Wayfair, the Supreme Court last week ruled in favor of South Dakota's argument that sales within a state constitute "nexus," or an adequate presence for the state to require sales tax once sales surpass $100,000 or 200 transactions. This ruling follows the Trump Administration's tariffs, igniting a potential trade war that could impact the value of goods sold internationally and subsequently the volume of fees for online payments.

Like the tariffs, the court decision — a 5-4 ruling with Justice Anthony Kennedy writing the opinion — creates complicated compliance for merchants, or potential costs to implement more digital filters to determine if a particular payment triggers a local state rule. It's harder to keep track of thousands of consumer locations than a merchant's warehouses or back office network, for example.

T.J. Kirkpatrick/Bloomberg

That means the underlying processes that support online payments, such as e-commerce interfaces or shopping cart technology, will have to accommodate a more complicated set of rules. Not all states may charge a sales tax for e-commerce, for example. Or some states may have a higher threshold than others. Or there may be conditional loopholes to provide incentives.

The ruling has far-reaching implications for all online merchants selling in the U.S., and especially international merchants selling via Amazon and other marketplaces, according to David Nicholls, director of enterprise development at OFX.

"It’s likely to cause much confusion in regards to both filing and more importantly for international merchants, paying those taxes," Nicholls said. "Many don’t even have a U.S. bank account to debit or send funds from to pay the taxes, which means big credit card fees or complicated international wires for small amounts of money."

Forty-five states charge sales taxes — all except Alaska, Delaware, Montana, New Hampshire and Oregon. State and local governments would have collected $13 billion more in taxes in 2017 had the Supreme Court's ruling been in effect.

The ruling could create a complex environment similar to Europe, which uses value added taxes instead of sales taxes. These value added taxes are calculated as part of the development process for a product instead of a percentage of sales. The U.S. likely won't move in that direction, but state rules will become more complicated and changeable over time.

Technology will play a critical role helping to solve these issues by helping merchants calculate tax liabilities in real time.

"The ruling will impact shopping carts that must calculate the tax and present it to the consumer," said Tim Sloane, vice president of payments innovation at Mercator Advisory Group, adding some carts are custom implementations that will require more work, though others have the ability to automatically update.

The National Retail Federation has argued the old system favors online retailers, since they don't have to charge sales taxes in every state. Wayfair argued the burden of compliance would be too much for many retailers that sell online, particularly smaller ones.

"The real impact is business related. Will the increased price inhibit consumer purchases?" Sloane said.

The loss of smaller retailers will pressure the payment processing and payment technology companies that serve the market. Their business could be threatened, or they could find an opportunity to sell API technology that hastens state tax compliance.

"We have been advocating this for years to various payment providers; maybe with this ruling, those efforts may finally mature," said David Campbell, CEO of tax cloud, which sells tax compliance software to online retailers.