In The Wake of Wayfair: Sales Taxes and Small Business

By SBE Council at 7 July, 2022, 11:02 am

SMALL BUSINESS INSIDER

By Barbara Weltman –

It had been a long-standing rule that sellers were required to collect and remit sales tax on transactions only in states in which they had a physical presence, such as an office or warehouse. In 2018, the U.S. Supreme Court in South Dakota v. Wayfair upended this rule and replaced it with an economic nexus rule. This gave the okay for states to require remote sellers to collect and remit sales tax on transactions within their borders.

The Court warned that there needs to be an exemption from this requirement for small businesses because the sales tax obligation is just too burdensome for them. Now, all states, other than those with no sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon), impose a sales tax obligation on remote sellers, although there are small business exemptions.

Are the exemptions sufficient? Are there simplified sales tax structures in place? What’s the financial burden on small businesses? What is Congress considering now as a way to help small businesses?

Small Seller Exemptions

South Dakota, the state that the Court considered, defines small remote sellers exempt from sales tax responsibilities to mean those with gross revenue exceeding $100,000 or 200 or more separate transactions in the previous or current calendar year. The Court decided that this exemption was sufficient to protect small businesses and startups.

Other states have adopted their own exemptions, some of which are limited to revenue while others take the number of transactions into account. The Streamlined Sales Tax Governing Board has a state-by-state listing of exemptions. No state has a lower revenue threshold than $100,000; some have higher thresholds. Missouri’s rule for remote sellers goes into effect on January 1, 2023.

Problems with exemptions. One problem is that states vary with their definition of revenue, making it challenging for small businesses to know where they stand. Some base their exemption on gross sales, gross revenues, retail sales, or taxable sales; some use both taxable and non-taxable sales in determining whether the threshold is met.

Another problem is that the exemption may be a trap for some remote sellers. They may anticipate being exempt only to find they’ve become subject to the sales tax rules. Then, there may be limited time (e.g., 60 days) to register and begin collections. Failing to do so can result in penalties.

Simplified Sales Tax Structure

There are over 10,000 sales tax jurisdictions within the U.S. This is because there are sales taxes levied by not only states but local governments in many areas as well. The Wayfair decision warned that a simplified sales tax structure was crucial to fairness. Most states have adopted a flat sales tax rate for collection by remote sellers to account for differences in sales tax within the state due to local taxes. For example, Alabama has a flat 8% sales tax rate, which is shared by the state and localities. Illinois is only collecting a 6.25% state sales tax.

Problems with sales tax structure. There are numerous problems with sales tax structure.

● The differences in sales tax rules from state to state make it challenging for remote sellers to be compliant. What items being sold are exempt under a state’s sale tax rules? Those using Shopify have built-in assistance to figure the tax, although sellers must still remit the tax and file reports; those selling from their own websites must DIY.

● Sales tax rates change, and sellers have to stay current with new rates.

● Registration confusion. To be able to collect and remit sales tax, and file required forms reporting sales tax activities, remote sellers must register with the state. Again, the registration procedure isn’t uniform. Usually, this is the state’s department of revenue. But in Louisiana remote sellers must register with a special office—the Louisiana Sales and Use Tax Commission for Remote Sellers.

Other Problems

To become and stay compliant with sales tax obligations, small businesses may have to incur substantial costs for software, registration fees, tax filing fees, accounting fees, and legal advice. There are also internal costs (e.g., added work for employees and added customer service).

Some states are using the economic nexus rule to expand other tax collections:

● California wants remote sellers to pay income tax based on sales within the state.

● Colorado now has a retail delivery tax, effective July 1, 2022, on any remote sale delivered within the state.

Finally, despite it being four years since Wayfair, it’s still not clear whether states can impose the economic nexus rule retroactively. Most states have explicitly barred retroactivity, but you never know.

Congressional Action

There have been efforts at the federal level to address problems for small businesses created by Wayfair and states’ responses to it. On June 14, 2022, the Senate Finance Committee heard testimony on the impact that Wayfair has had on small businesses.

While there is no current legislation pending in response to this testimony, it is hoped that federal laws will bar retroactivity of Wayfair and impose rules to require simplicity and fairness for small businesses. (There had been proposals, such as the Online Sales Simplicity and Small Business Relief Act of 2018 [H.R. 6824] to prohibit retroactivity, but the proposals never gained traction.)

It’s been suggested by the National Taxpayers Union Foundation that Congress could ease the burden on small business by providing incentives for states to join the Streamlined Sales and Use Tax Agreement (SSUTA). The 20 states that have joined the Agreement impose a simplified state rate, have uniform definitions of products and services subject to sales tax, and provide sellers software paid by the state for administration purposes; those using the software are immune from sales tax audits. Another option for simplicity would be the creation of a national sales tax.

Another helpful solution would be to allow businesses to seek redress of state and local matters in federal courts. Currently, the Fair Access to Interstate Remedies (FAIR) Coalition (of which SBE Council is a member) is supporting legislation to change the Tax Injunction Act, which bars most state and local cases from being heard in a federal court.

Conclusion

You can learn more about sales tax for remote sellers from Avalara. And if you now or are considering selling outside of your state, speak with your CPA or other tax adviser to be sure you’re compliant with sales tax obligations on remote sellers as there may be more action in the days and weeks ahead on the sales tax issue.

Barbara Weltman is a member of SBE Council’s advisory board, and has been a leading consultant for small businesses of every kind for over twenty years. She’s the founder of Big Ideas for Small Business® and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, Complete Idiot’s Guide to Starting a Home-Based Business, and The Rational Guide to Building Small Business Credit. Follow Barbara on Twitter @BigIdeas4SB.