More than six years ago, the Supreme Court ruled in South Dakota v. Wayfair that businesses could be required to collect sales taxes on behalf of states even if they had no physical presence in that state. That decision, while intended to help states collect revenue from online sales that they had been struggling to get ahold of, has created all kinds of tax compliance headaches that threaten to force tens of thousands of small businesses into shutting down operations due to the sheer paperwork burden. Fortunately, Congress — and specifically Senator Maggie Hassan (D-NH) — is starting to think about real, meaningful solutions to this longstanding issue.
When people think of online sales, they think of Amazon or Walmart. But those companies weren’t really affected by the Wayfair decision — Walmart had physical presence in the form of brick-and-mortar stores nationwide, while Amazon had voluntary compliance agreements with every state in the country by the time of Wayfair. Larger online-only retailers were unhappy, but had the economies of scale to begin the process of integrating expensive sales tax compliance software into their operations.
But while these companies managed, small businesses faced — and continue to face — annihilation. Within just about a year of the Wayfair decision, small businesses that once faced sales tax compliance obligations in one, maybe two states, suddenly found themselves expected to be familiar with and compliant with sales tax regimes of states all around the country.
That entails not just knowing all the differences and nuances of what is taxable, what a product is defined as, and what tax rates are for different states all around the country, but also the estimated 13,000 unique sales tax jurisdictions within states. On top of that, these small business owners were expected to be keeping up with changes that states make to their tax codes and administrative guidelines. And that’s even assuming that these small business owners happened to hear about this particular Supreme Court case and its implications in the first place. All told, it’s a job for an entire team of state and local tax experts, not small business owners.
States advocating for this change argued that software would be a cure-all, but that’s proven false. Tax compliance software on this scale is inordinately expensive, both to purchase and to integrate into business operations. And businesses that choose to trust the wrong software company can be held responsible for the errors it makes.
These challenges are a real and tangible threat to tens of thousands of small businesses around the country at risk of being held liable for all the tax revenue they are not properly collecting — not because they don’t want to, but because the task is better suited to a gaggle of CPAs than a small business owner. The necessary skills to succeed as a small business owner should include entrepreneurship, innovation, and business management, not tax expertise.
Fortunately, Senator Hassan has begun putting together a solution that allows small businesses to comply with their sales tax obligations by making the compliance burden more reasonable. Her recently-released Lowering Costs for Small Businesses Act balances federalism with the need to help out small businesses by laying down protections and some minimum standards of simplification that states must adhere to before they require small remote businesses to collect sales taxes on their behalf.
Senator Hassan should be commended for taking on a major issue that is flying under the radar due to lack of political power small businesses tend to have in Washington. Now, it’s up to the rest of Congress to deliver relief to small businesses drowning in paperwork.
