“The family-owned furniture makers, tool and die shops, clothing boutiques — they shouldn’t be forced into spending big on sales tax consultants and software,” said Sen. Ron Wyden (D-OR), opening up a Senate Finance Committee hearing on the fallout from the Wayfair decision. The Supreme Court in South Dakota v. Wayfair decided that states can tax the online sales of out-of-state sellers for products delivered into their states. Since Wayfair was first decided in 2018, many states have aggressively enforced laws that require online businesses to collect and remit these taxes.
As Wyden points out, 45 states and hundreds of localities have their own laws for sales taxes, with differing tax rates and regulations for how the taxes are collected. The varying rules and definitions of what constitutes taxable products further complicate the issue. Many states have an exemption for small businesses based on the annual sales volume or number of transactions; however, the rules still vary and many ensnare what normally would be considered small businesses. Most have an economic nexus standard of $100,000 or $200,000 in sales per year or a 100 to 200 transactions rule and tax businesses that meet either of those thresholds, according to testimony from the Government Accountability Office. Think about it; a stay-at-home mom who sells soap could easily meet a 100-transaction threshold!
Witnesses Recount Compliance Problems
The witness testimony at the hearing was compelling. John Hennessey of Littleton Coin Company, Inc. in New Hampshire said the company spent $218,000 in 2018 alone to begin compliance with the sales tax rules of over 12,000 jurisdictions. The company continues to spend $50,000 per year for annual software licensing, registration fees, tax filing fees, accounting fees and legal advice.
“I didn’t start a business to be a sales tax expert,” explained Michelle Huie, who owns VIM & VIGR Compression Legwear in Montana. Huie said after paying consultants, she discovered she had economic nexus in 22 states, not including Montana, because her home state has no sales tax. She also pays $50,000 a year to attempt to stay compliant. “I’m part of a forum of thousands of eCommerce sellers. We want to be compliant and pay our taxes accordingly, but the current conditions make it excessively complicated and add major costs and administrative burdens as well as fear that we’re not doing something correctly,” she lamented. “I know of businesses that have had to close because the administrative complexities and costs were just too much for [the] owners.” Huie then called for some type of national uniformity criteria for sales tax collection.
Craig Johnson, Executive Director of the Streamlined Sales Tax Governing Board (SSTGB), told the Committee his organization is working with states to make sales tax collection simpler and more uniform. Member states have simplified and modernized their sales tax systems through conformity with the Streamlined Sales and Use Tax Agreement, a blueprint for states to simplify and modernize tax compliance; however, only 24 states have passed conforming legislation, and those states became full members before Wayfair was decided. While the success of the SSTGB in simplifying state sales tax collections is real, its reach is limited.
Possible Congressional Action
Wyden believes “Congress ought to step in and give small businesses some relief” by exempting small businesses that have revenues under a certain threshold and creating “clear, standardized rules that lay out what states can require of small businesses outside their borders.” Wyden co-sponsored a bill in 2019, the Online Sales Simplicity and Small Business Relief Act, which would prohibit online sales tax collection on small business remote sellers until Congress approves an interstate compact on taxing remote sellers. The legislation defines small business remote sellers as businesses with no more than $10 million in annual gross receipts.
The Supreme Court took up the Wayfair case because Congress failed to enforce a national strategy for state taxation of remote sellers. Because of the sheer amount of revenue gained by states, estimated by GAO to be more than $32 billion, and state governments’ sway in Congress, it is unlikely that Congress will act anytime soon.