E-commerce Love/Hate Relationship with Sales Tax
Last year the Supreme Court turned the ecommerce business world upside down with their South Dakota v. Wayfair, Inc. ruling. This unexpected reversal of long-held tax law effectively made online sellers like Working Away responsible for collecting and paying sales tax in every state where they sell a product. One year later, many of those taxes are now coming due.
Please understand, I am not opposed to the tax. I get it. States lose money when their residents buy toilet paper from Amazon, who doesn’t collect sales tax, versus a local grocery store who does and pays it to the state. And the state should get it. Amazon and their customers need airports, well-maintained roads and working traffic lights to complete their transactions. And they should pay the state for them.
The problem is that we sell products in 50 states and each state has different laws around who, when, why, how much and what counts in taxing items that our customers buy online. And as a small company, we don’t have the resources that Amazon does to comply.
Before the Wayfair ruling, we were responsible for paying sales tax only in the states where we have an office. We are headquartered in Rhode Island, and have support staff in New York and Washington, so we collected taxes only in those states. Theoretically this was not costing us; we were collecting money from customers and passing it on to their states. But the transactions did incur serious costs to our business. We paid for the software needed to determine in real time which buyers should be charged sales tax and how much, the business fees and administrative costs of registering the business in each state, and the accounting fees for monitoring state laws and filing returns on a quarterly basis.
The Supreme Court’s ruling means that we no longer need an office in a state to pay taxes there. Now, not only do we need to file taxes in RI, NY and WA, but potentially in the other 47 states where we sell products.
Keeping up with the regulations alone is overwhelming, much less accounting for it in the e-commerce software, registering in every state where we make a sale and processing all of those returns.
The filing requirements per state are dizzyingly inconsistent. In Arizona, we only charge sales tax if we sell more than $200,000 worth of items this year. But it goes down to $150,000 next year and to $100,000 the next. I’d put a memo over my desk to remember that, but I’d need about fifty memos, because that threshold is different in every state, as is the sliding scale to decrease it. And we’ll need to be inhumanly accurate in our yearly sales projections because if we cross one of these thresholds unexpectedly, we will be responsible for paying taxes on the products already sold, whether we collected the money from my buyers or not.
There is also inconsistency in what qualifies for taxation. In most states we are only taxed for the the physical items we sell. So the exercise bar and yoga balls do get taxed, but the online video showing how to use them does not. Unless you live in Arkansas. In that state we are taxed on the home workout videos, as well.
Recall that we not only need to track the myriad rules and regulations, but also need to register the business in the states where we think we will be needing to pay taxes within a given year. Twenty-four states got together to develop a one-registration-fits-all form to streamline the process, but that still leaves 26 states that need separate registrations. Each one of those registrations has the paperwork equivalent to buying a house, but working with an overwhelmed state employee communicating through sporadically returned voice messages. It’s a months long process at best. Per state.
And then there are the city taxes. Alaska does not charge state taxes, but the city of Nome recently started taxing remote sales of more than $100K. As did 100 other Alaskan cities. New York state charges by state, city, county and school district, a technical nightmare for tracking electronically.
We could stop selling in states where we are not already registered, but that’s a potential 94% loss in revenue. Not an ideal choice.
While in their ruling, the Supreme Court outlined safeguards to protect small businesses from burdensome regulations, the reality is that these mandated safeguards are too vague to be effective.
Congress needs to step in with clear, concise minimum requirements that allow states to collect the revenue they need, but does not overburden the growing ecommerce economy.