Back in June, the Supreme Court came to a decision on the sales tax case of South Dakota vs Wayfair. The state of South Dakota had been arguing the boom in e-commerce was costing their state tax revenue. Until June, the law did not force retailers to collect sales tax if they did not have a physical presence in the state. The Supreme Court ruled in favor of South Dakota, though, allowing for them to continue to collect on e-commerce sales. It was determined their tax laws weren’t a burden on interstate commerce. This is In part, due to the safe harbor provisions for smaller businesses who don’t conduct many transactions.
The ruling presented concerns among retailers, though. Does this open the door for other states to retool their tax laws, some of which are already over complicated? Is this going to impact the small business sales in their ability to remain competitive, especially those with limited physical presence? Many are looking to Congress to settle the issue with a national internet sales tax.
Will we have a national Internet sales tax in 5 years?
In our 2022 Futures of Technology survey, about half of the respondents believed we would have such a sales tax in the next 5 years. However, the survey was taken before the June ruling, so it seems almost inevitable now a federal solution is on the horizon. One such incarnation of this is the Marketplace Fairness Act.
Introduced in September, the Protecting Small Business from Burdensome Compliance Costs Act of 2018 seeks to offer some protection and simplicity for retailers while a federal solution is created. It seeks to force states to pick one uniform rate not exceeding the combined state and highest local tax rate. Meaning states can’t force retailers to collect based on the zip code of purchasers, and they can’t collect more tax than if the good or service was bought in state.
This is a good step for competitive pricing, but what about small businesses not looking to raise prices at all? Again, half of respondents to our survey believe a national sales tax will hurt their business.
Will a national Internet sales tax hurt your business?
The Wayfair decision highlighted a safe harbor threshold for $100,000 in sales or 200 transactions in-state. It was suggested this be the standard states follow. But by looking at the thresholds from states enforcing laws in October, this uniformity was not upheld. The MFA held a provision for small businesses to be exempt as long as their remote sales total under $1 Million dollars. While easy to understand and uniform throughout, this threshold is actually lower than current state by state laws. Each participating state is essentially giving an allowance for businesses. $100K allowances spread out begins to add up in the end.
From a consumer perspective, a national internet sales tax could solve issues with the complexity of their own taxes. Many states currently rely on self-reported use taxes in which purchasers are meant to report their own online purchases and remit payment. All federal solutions for this take the responsibility out of the hands of the consumer. Amazon began collecting sales tax and remain generally unaffected. Their size and convenience of service obviously still trumps the traveling to multiple stores (and still paying tax).
However with the responsibility of tax reporting taken out of the consumers’ hands, it’s being forced into business owners’. Many have called the deadlines to fall into compliance unfair. After the Supreme Court ruling, 11 states set an October 1st deadline for online sellers to be compliant with their new tax laws. Today four more states’ online taxes laws go into effect including North and South Carolina, New Jersey and South Dakota.
Less than a year’s time to bring a company in line with each states’ laws is not easy, as every state is different. Some tax shipping. Some don’t tax certain goods. Others tax similar products differently. Companies like Alavara, Vertex and Sovos are providing guidance and solutions for integration. But this doesn’t stem the overwhelming minutia involved with taxes. The majority of man hours and resources are spent on the odd cases, not the common customer. Customers who are tax exempt, for example, will present issues.
This rush to compliance has also given rise to a new fear for business owners, the audit. It’s not hard to imagine some ‘t’s may go uncrossed and some ‘i’s undotted. The lack of time, aid, and general complexity of every states’ needs can be a pitfall to anyone in the e-commerce world. Sellers solely on the Amazon marketplace can have Amazon collect the tax for them. However, the same issues with special case customers still arise and getting collection reports can be difficult. If you deal both on Amazon and your own shop, then it simply doubling up on the headaches to become compliant.
In the end, bringing a business into compliance is going to be a lot like swallowing medicine you don’t want to or ripping off a band-aid. Once it’s done, it’s done. There are still six more states slated to have collection laws go in effect by January 1, 2019. They include Connecticut, Georgia, Iowa, Louisiana, Nebraska, and Utah. Other states have yet to formalize their laws, while a few are in litigation. If nothing else, online sellers can be thankful for the handful of states who don’t sales tax.