The consequences of the Supreme Court's decision in South Dakota v. Wayfair were entirely foreseeable. And while the clock is running out on Congress to solve the problem, lawmakers are beginning to receive the kick that they need to recognize the state of play on state sales taxes on remote businesses as a serious and pressing issue.
Before Wayfair, states could only impose sales tax collection and remittance obligations on businesses that had some form of physical presence in that state, such as a warehouse, storefront, or employee. But after Wayfair, states got the green light to impose so-called “economic nexus” tax obligations, by which businesses incurred sales tax collection obligations on the basis of a level of sales into that state.
It took just over a year for nearly all states with a sales tax to put these economic nexus rules into place, but passing a law was far easier for states than complying with it was for remote sellers. For those remote sellers, especially small businesses, economic nexus rules meant transitioning from filing sales taxes in just one or two states to filing in states around the country.
All those added states mean more than just extra paperwork. Complying with another state’s sales tax system means familiarizing oneself with all the different rules, definitions, and exemptions that each state uses, as well as integrating that additional information into accounting and tax software. What’s more, outlier states like Louisiana and Colorado add difficulties through extra taxes and separate tax systems at the local level.
Taken together, businesses are either paying an arm and a leg to be in compliance, or are out of compliance and trying to keep their heads down. One business NTUF is representing in a case against Louisiana’s tax system estimates that it spends $2.28 for every $1 in sales tax that it remits.
But while this is a major issue, it has to this point largely flown under the radar. That may finally be changing — the Senate Finance Committee held a hearing on the issue just a few months ago. This week, the Government Accountability Office, a government watchdog agency, released a report recommending changes at the federal level to ease the burden of the status quo on businesses.
Part of the difficulty in mobilizing support for reform has been a lack of data on the scope of the problem. Fortunately, a recent study by NTUF should shed some light on that.
By looking at self-reported compliance numbers in December of 2019, by which point all but three states with a sales tax had economic nexus rules in effect, NTUF was able to estimate that just under 50,000 remote businesses were out of compliance with their economic nexus obligations by that point. Though the vast majority of these businesses were small businesses, they nonetheless employed over 400,000 Americans between them.
Should states come after these out-of-compliance businesses for unremitted taxes (something far likelier in coming years should state budgets become less flush), businesses would be on the hook themselves for sales taxes that they never had a chance to collect from the consumer who owes the tax. Not only could overzealous state revenue officials put businesses under in this way, they could even go after business owners’ personal assets, piercing the veil of limited liability.
Top-down reform, and action by Congress, is badly needed to rectify this problem. States have had ample opportunity to pursue common-sense changes that would ease the burden on remote businesses, but either through ignorance or indifference they have failed to do so. Should Congress fail to do it for them, a burgeoning sector of the economy will suffer for it.
