On March 3, 2020, the United States House of Representatives’ Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital Access, held a hearing titled, “South Dakota v. Wayfair, Inc.: Online Sales Taxes and their Impact on Main Street.” The hearing focused on the burden posed by the US Supreme Court’s decision in South Dakota v. Wayfair, Inc.
Four witnesses testified before the committee: a representative of the American Institute of Certified Public Accountants (AICPA), and officers of three small businesses: K-Log, Inc. (furniture seller), FindTape.com (glue and tape seller), and Halstead Bead, Inc. (furniture wholesaler). Copies of their written testimony, along with Representative Andy Kim’s statement, are available here.
The witnesses made a number of recommendations for easing their sales tax compliance burdens, including: (1) one sales tax rate per state; (2) nationwide economic nexus thresholds for purposes of determining whether their businesses are subject to sales tax collection; and (3) the ability for taxpayers to sue states for aggressive audit practices either in the taxpayers’ own states’ courts or in federal court.
South Dakota v. Wayfair, Inc.
In 1992, the US Supreme Court held in Quill Corp. v. North Dakota1 that a state could not require an out-of-state seller to collect sales or use taxes unless the seller established a physical presence within the state.
In June 2018, the Court decided South Dakota v. Wayfair, Inc.,2 overturning its physical presence standard and upholding a South Dakota law that required an out-of-state seller to collect tax if it makes at least 200 separate sales or $100,000 worth of sales in the state, regardless of whether it has a physical presence. In its decision, the Court addressed the challenges of sales tax collection and the availability of technology to help ease those burdens. Specifically, the majority opined, “Eventually, software that is available at a reasonable cost may make it easier for small businesses to cope with [the] problems” of nationwide sales tax collection. The majority continued, “Indeed, as the physical presence rule no longer controls, those systems may well become available in a short period of time, either from private providers or from state taxing agencies themselves. And in all events, Congress may legislate to address these problems if it deems it necessary and fit to do so.”
Since Wayfair, 43 states and the District of Columbia have adopted state sales tax collection and remittance obligations for out-of-state vendors.
AICPA: The AICPA representative expressed concern regarding the lack of uniformity across states for economic nexus thresholds and emphasized the need for consistency. Small businesses may face a large tax compliance cost, even when they may actually owe very little tax. The AICPA recommended:
- The following minimum income and sales tax nexus thresholds, which would be adopted on a prospective basis: (a) a designated threshold amount of taxable sales (for sales tax purposes) or gross sales (for income tax purposes) in the state (approximately $500,000– $1,000,000); (b) $100,000 property located in the state; or (c) $100,000 payroll located in the state;
- Consistent and clear definitions for marketplace sellers, to avoid the unintended double collection of sales tax;
- A standardized measurement period for small businesses to determine if they exceeded economic thresholds;
- A 90-day grace period following the close of the taxable year before the remote seller must register to collect and remit sales tax; and
- Taxability matrices for all states.
K-Log, Inc.: Its Vice President testified to the costs of registering for and complying with nationwide sales tax laws. She stated that it has taken one year to register and comply with 42 states’ sales tax regimes, even though the majority of their sales are tax-exempt, at a cost of $75,000 to the business. She also commented that it is difficult to comply with taxes imposed by localities and managing exemption certificate requirements. The K-Log representative recommended that states should:
- Adopt one sales tax rate per state;
- Have a single filing point;
- Eliminate penalties during implementation periods; and
- Create an education program for sellers.
FindTape.com: Its President/Founder testified to the difficulties with sales taxes when selling through marketplace facilitators. His company is currently being audited by Washington state dating back to 2013. The FindTape.com representative recommended that states should:
- For purposes of establishing filing standards, eliminate transaction thresholds and elevate dollar minimums to at least $250,000; and
- Allow online sellers to pay one tax rate per state.
Halstead Bead, Inc.: Its Financial Director testified to the costs of complying with sales taxes. He noted that the company had spent $183,500 and 3,800 labor hours to collect just $79,423 in sales tax. The company is restricting sales to Colorado customers because it would not be able to comply with Colorado’s tax collection requirements. The Halstead Bead representative recommended that:
- States should rely on a national threshold of $30–$40 million of sales; and
- Taxpayers should be allowed to sue other states in their own states’ courts or in federal court.
The committee members were concerned with Wayfair’s impact on small businesses. Representative Kim, the subcommittee’s chairman, stated that he wants to “explore some actions that Congress can take” to alleviate their nationwide sales tax compliance burdens.
The Eversheds Sutherland (US) SALT Team will continue to stay abreast of any federal developments regarding compliance with state nexus laws in the wake of the Wayfair decision.
1504 U.S. 298 (1992).
2138 S.Ct. 2080 (2018).