When the Supreme Court handed down its decision in South Dakota v. Wayfair empowering states to force even out-of-state businesses to collect their sales tax, an increase in complexity for small e-retailers was a given.Wayfair meant that many of those businesses had to suddenly shift from collecting sales taxes in one or two states to filing in dozens. But while that’s burdensome enough, some states have made no effort whatsoever to reduce the complexity small retailers face when filing — a move that puts them at odds with the Constitution.
One of those states, Louisiana, is now the target of a lawsuit that could force states to modernize their tax codes before requiring out-of-state businesses to collect and remit taxes to them. National Taxpayers Union Foundation is teaming up with an Arizona-based business to challenge Louisiana’s archaic sales tax structure, with partners at the Goldwater Institute in Arizona and the Pelican Institute in Louisiana.
Halstead Bead is a small, second generation family business selling jewelry components like chains and clasps. Since states began imposing tax collection obligations on the basis of economic nexus, they have spent7,700 hours and $297,000 on sales tax compliance over the past three years despite having less than 30 employees. For every dollar in sales taxes Halstead Bead collects for other states, it incurs more than twice that amount in compliance costs.
Despite their best efforts at complying with the law, Louisiana’s byzantine tax structure makes it prohibitively costly for small businesses like Halstead Bead to sell past certain thresholds in the state. That’s why the company is filing suit in order to bring about much-needed simplification.
Not every state’s tax structure is created equal. Twenty-four states, including South Dakota, the state at issue in the Wayfair case, are members of the Streamlined Sales and Use Tax Agreement, an agreement to reduce complexity by harmonizing sourcing rules and tax definitions and offering free tax preparation software. Most other states at least administer their sales tax at the state level, ensuring that out-of-state businesses need “only” familiarize themselves with one more set of tax rules, rates, and definitions per state they sell into.
Louisiana does none of those things. Though the state has a general sales tax, 63 of the 64 parishes have their own tax system on top of this — meaning not just higher tax costs, but new definitions, exemptions, and rules as well. That makes selling into Louisiana potentially more complex than filing into any number of other states with a centralized tax system.
Adding insult to injury, much of Halstead Bead’s business is wholesale, where they sell items to a retail outlet that collects tax when the full item is sold to the general public. But most states make no distinction between sales that are or aren’t taxable when establishing transaction thresholds, meaning that businesses like Halstead can be forced to comply with all of the tax rules despite having zero dollars in actual sales tax responsibility at the end of the day.
Louisiana had an opportunity to start reforming its tax system. Amendment 1, on the ballot this past week as a legislatively referred constitutional amendment, would have begun the process of centralizing the state’s tax collection system. Unfortunately, the proposed amendment failed by a narrow margin, setting the state back to square one.
Louisiana’s tax system is incompatible with the free flow of interstate commerce. Requiring small businesses to collect and remit sales taxes on behalf of states across the country is burdensome enough without added complications. States that pushed for economic nexus laws to receive judicial approval need to meet small businesses halfway and modernize their tax systems before they demand that businesses comply with them.
