States and localities who’ve benefited from increased revenue following the Supreme Court’s South Dakota V. Wayfair decision may be required to adopt a uniform tax rate in the future to help small businesses comply with hundreds of burdensome tax regimes and administrative costs.
That was a topic of discussion Tuesday as small business owners and senators gathered for the Senate Finance Committee’s hearing examining the impact of the 2018 Wayfair decision on small businesses and remote sales.
“I’m not here to challenge the payment of sales tax, it’s a major revenue stream for states and the shift to online commerce has changed the dynamics that don’t work for pre-existing regulations,” said Michelle Huie, founder and chief executive at VIM & VIGR Compression Legwear, a small business based out of Missoula, Montana. “I’m here to ask to simplify the process for e-commerce businesses,” she added.
Huie urged senators to consider creating more uniformity around the criteria used to calculate sales tax nexus, for states to provide one sales tax rate for e-commerce sales and to create a centralized clearinghouse for registering and paying sales tax.
“E-Commerce is a $1 trillion dollar industry growing at around 16% annually,” Huie said. “Complexities around sales tax compliance limit the growth of e-commerce businesses, especially for small business owners,” she said. “This is a time to simplify the sales tax process.”
According to the U.S. Government Accountability Office, $23.1 billion was collected from remote sales in 2021, based on data from 33 states. That is a long jump from the $3.2 billion collected in 2018, $6.7 billion in 2019 and $16.3 billion in 2020.
But those increases have come at a cost to small businesses, who often have to deal with dozens if not even more separate tax regimes.
“The Wayfair decision as it's known in the courts gave states a green light to force small businesses into becoming tax collectors when they sell online, collecting taxes for states even where businesses had no brick and mortar presence,” said Sen. Ron Wyden, D-Ore., who is chair of the Finance Committee. “Small businesses had never been responsible for this kind of tax collection before.”
All 45 states with a statewide sales tax as well as the District of Columbia have adopted requirements governing sales tax collection by remote sellers based on an economic presence, as opposed to a physical presence in the state. These regulations often vary greatly in a number of ways including effective dates, exemptions for small businesses below certain thresholds, how certain thresholds are calculated and whether local taxes apply, the U.S. Government Accountability Office said.
“It is estimated that about 30,000 jurisdictions have the authority to impose sales taxes, and that between 10 and 12,000 actually do so,” said James McTigue, director of tax policy and administration at the Government Accountability Office.
Senators agreed with business owners that action needed to be taken to reduce compliance and remittance burdens, which cost Huie’s business $50,000 a year. Actions are already being taken by some organizations to deal with these complexities, but small business owners still say the costs associated with outsourcing or challenging certain state decisions still put them at a great disadvantage.
The Streamlined Sales Tax Governing Board aims to simplify this process at the state level and counts 24 states as members dedicated to improving the burdensome process of tax compliance and remittance.
“It is inherent in our sub-national sales tax structure that the rules will vary by state,” said Diane Yetter, president and founder of the Sales tax Institute. “However, states should make every effort to reduce the complexity and variations of the laws that can create avoidable burdens on sellers.”
There are efforts that Congress as well as states can take to simplify this burden, Yetter said. She urged more states to sign on to the Streamlined Sales Tax Agreement, as many of the largest states aren’t members. But federal guidelines detailing how much individual states can charge may be the most effective for small business and states alike.
“Simplifying the sales tax process will help free up time and dollars that can be reinvested to their people and their businesses,” Huie said. “This will all help business owners become more compliant, which will generate more dollars for your state.”
