The United States of Sales Tax

South Dakota Vs. Wayfair: Implications and Why you Should Care

It’s been said the only two things certain in this world are death and taxes. Between the two, the Tax Man would even seem to have an edge over the Grimm Reaper in this Post-Wayfair world in which we now live.

The South Dakata Vs. Wayfair supreme court decision hasn’t created a ripple — it’s created a tidal wave that threatens many small and medium businesses. What is it, what has happened since the decision, and why is it imperative that congress acts soon?

Remember when there was no sales tax online?

You may or may not know that you really were supposed to pay tax to your home state for all those “tax free” Amazon.com purchases. That’s right, we’re all tax cheats. Every. Last. One of us.

State departments of revenue knew individuals simply weren’t paying the tax owed, but they had no good remedy. Sure, they could audit individuals, but paying an auditor for a week to come up with maybe a thousand dollars of tax revenue just isn’t “profitable.”

State governments knew the only way they could get their tax money is to require companies to pay. Audit Aunt Margaret and come up with $87 in tax revenue. Audit a small business and you could find tens of thousands of unpaid tax dollars.

There was just one problem. The Internet made it easy for companies to sell products to people in other states, and existing legal opinion was that a company had to have some sort of physical presence in a state to be subject to the sales tax laws of the state.

South Dakota changed its sales tax law to say that a company had nexus — a requirement to pay sales tax in a state — if that company sold $100,000 of goods or 200 separate orders into the state. In South Dakota vs. Wayfair (an online retailer) the supreme court held that South Dakota’s sales tax law is constitutional.

Post-Wayfair

The Burden

The burden on businesses to determine what they need to do to follow the laws in all 50 states is extreme in my opinion. I won’t go through the full list of issues because just like every other person on the planet, I don’t fully understand the issues, but to name a few:

  • Each state can define its own thresholds for Nexus
    Maybe it’s $100,000 or 100 sales, maybe it’s $500,000. Maybe it’s even lower. Maybe a state changed its law. How would you know?
  • Each state can set different tax rates on different categories of products and services
    In Illinois, shipping charges generally aren’t taxable if the price charged is close to the cost of shipping and there is a free pickup option for customers. Other states might always tax shipping. Some might not. Some might consider graphic design service taxable. Some might not.
  • You have to register and file in each state
    Do you have to file quarterly? monthly? It all depends of course. Oh, and registration fees do apply.
  • You need to constantly track sales in each state over the last 12 months
    Most states set their thresholds off of your last 12 months of sales, and as soon as you pass the threshold, you need to start filing immediately.
  • Some states require you to not only pay the state sales tax, but county, city, and even “special district” sales tax
    As some tax service companies love to point out, there are tens of thousands of taxing bodies in the US that you might need to take into account when filing your sales tax returns. Think about all the city councils in the country who at any time could vote to raise their sales tax.

The “Solution”

Sounds good to me, so why the scare quotes around “solution”?

Because this comes at a cost. Now I know people don’t generally have much sympathy for businesses — If you want the privilege of doing business in a state, you need to follow the laws of the state(and all of its counties and cities).

I understand that view, but here’s the problem with it. Every penny that a business has it gets from its customers. Not only do consumers get hit with more tax, they will have to pay the overhead of compliance with the laws.

I have nothing against companies like Avalara, but people should not see them as a good solution to this problem. Tax compliance is not a productive endeavor. Every dollar that a company pays to have their sales tax handled is a dollar less towards innovation on a product that will improve people’s lives.

The Future

My guess is that a very large number of small businesses are simply going to put their heads in the sand and hope this is all just a bad dream. Frankly that might not be a bad approach. There are so many small businesses across the nation, it isn’t possible for a state department of revenue to track down each and every one to make sure the proper sales taxes are being filed.

Congress needs to act

But a true solution needs to eliminate the legal and logistical nightmare of complying with a range of ever-changing state laws. There are simple measures that could provide significant relief — allowing states to only require outside companies to pay the state portion of sales tax, not down to the county and city level, or requiring state tax laws to be published in a standardized way in a central location.

These measures could help reduce the compliance burden while still letting states bring in the sales tax revenue they feel they need.

Educational Psychology Ph.D., business analytics nerd, computer scientist, President @MakeStickers