Since the Supreme Court decision in Wayfair vs. South Dakota four years ago, the sales tax arena has been filled with complexity and confusion. States acted quickly to take advantage of the opportunity afforded by the removal of physical presence test as a prerequisite for them to impose sales tax nexus.
But legislative and regulatory changes in the 45 states plus the District of Columbia that collect sales tax clouded the landscape, leading to the conclusion that online sales taxes are “a major source of headaches and costs for small businesses,” according to Ron Wyden, D-Oregon, chairman of the Senate Finance Committee. He noted that the Wayfair decision gave states “a green light to force small businesses into becoming tax collectors when they sell online — collecting taxes even for states where those businesses had no brick-and-mortar presence.”
Tax attorney Barbara Weltman, author of “Small Business Taxes 2022,” agreed.
“The sales tax responsibility for small businesses that sell remotely has become a nightmare,” she said. “Yes, there’s an exemption for very small businesses. But those near the threshold don’t know whether they’ll cross it, triggering sales tax registration, collection, and remittance. Small businesses have enough trouble with federal income taxes and their own state income tax rules, where applicable. Sales tax on remote sellers is just another burden on small businesses, and unless they can afford an outside service, there’s very little guidance on how to meet sales tax responsibilities in all the remote locations of their customers.”
The full Senate Finance Committee held a hearing on the “Impact of South Dakota v. Wayfair on Small Businesses and Remote Sales” on June 14, 2022.
“Small businesses had never been responsible for this kind of tax collection before,” Wyden noted. “Almost immediately after the ruling, states across the country began passing these tax collection laws.”
Senator Mike Crapo, R-Idaho, ranking member of the Finance Committee, agreed. “By giving states the ability to collect sales tax from residents even when a sale occurs remotely, Wayfair attempted to address the disparate treatment of brick-and-mortar stores and online sellers,” he explained. “Notably, it does not result in sales tax being imposed on residents of non-sales tax states.”
“The different standards and thresholds between states and localities can create a burdensome and complex system that makes compliance difficult for small businesses,” he said. “Sellers now must either learn to comply with the rules of myriad tax jurisdictions where their customers reside, or hire specialized advisors.”
Scott Peterson, vice president of U.S. tax policy and government relations at Avalara and former executive director of the Streamlined Sales Tax Governing Board, concurred.
“The thrust of the hearing was the lack of certainty around when a retailer should start collecting tax,” he said. “And that issue is the result of considerable differences in state thresholds, with sellers not knowing when they need to collect in a particular jurisdiction.”
The recurring theme was “I have to pay someone to tell me how to start collecting,” he remarked. “Both small business witnesses made that statement, and committee members made similar statements — this is what they’re hearing from constituents. Businesses were unaware of tax collection obligations, and when they became aware they already owed back taxes.”
The poster child
The poster child for the complexities of state taxation of remote sellers is the Louisiana system. The state’s constitution requires each of the state’s 64 parishes to collect sales and use taxes, with each parish setting its own tax rates and categories — and state law requires out-of-state businesses that sell to Louisiana customers to register and file reports in each parish where sales are made.
The overwhelmingly complex system is being challenged in federal court by Halston Bead, a family-owned jewelry and craft supply wholesaler based in Prescott, Arizona. The suit alleges that the Louisiana system crosses the line set by the Supreme Court in Wayfair. In its brief, the company argued that the state places an unconstitutional burden on businesses that wish to sell to residents of Louisiana due to its sales tax complexity. The company sells to customers across the country but avoids sales to Louisianans because of the immense burden placed on small businesses by the sales tax system.
“The Supreme Court sent clear signals in Wayfair that overly complex sales tax rules would be a violation of the constitution’s due process and commerce clauses,” said Joe Bishop-Henchman of the National Taxpayers Union Foundation, the lead attorney for Halstead Bead.
The case was recently decided against Halstead Bead by the Eastern District Court of Louisiana, and a notice of appeal has been filed to the U.S. Court of Appeals for the Fifth Circuit.
“The reasoning in the Eastern District Court’s decision to dismiss on Tax Injunction Act grounds is wrong,” said Bishop-Henchman.
Under the Tax Injunction Act, federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under state law where a plain, speedy, and efficient remedy may be had in the courts of such state.”
“Halston Bead is willing to remit taxes but the complexities of Louisiana's tax registration and reporting system make it prohibitive for them to do so,” said Bishop-Henchman. “We’re confident that when this case is considered on the merits, we will prevail. Louisiana’s remote sales tax structure does not follow the guidance laid out by the Supreme Court in Wayfair, specifically that sales tax rules should not impose unreasonable compliance burdens on small businesses.”
“The state’s rules are insanely complex and difficult to comply with,” added Tyler Martinez, senior attorney at NTUF. “This is the first case that challenges what Wayfair means in other states — until now, no one has challenged how other states have applied Wayfair.”
Martinez and Bishop-Henchman, in a statement to the Senate Finance Committee, suggest a legislative solution built on the Streamlined Sales Tax.
“The most frictionless path forward for Congress and the states would be to mandate or incentivize states to join the Streamlined Sales and Use Tax Agreement, which has existed for decades to ‘simplify and make more uniform the sales and use tax collection and administration for retailers and states,’” they stated. “The Supreme Court’s ruling in South Dakota v. Wayfair cited South Dakota’s membership in SSUTA as a feature of South Dakota’s tax system ‘that appear[s] designed to prevent discrimination against or undue burdens upon interstate commerce.’”
However, they noted that even as each state with a sales tax has adopted economic nexus rules since Wayfair, no new states have joined the SSUTA since the ruling. There are currently 24 member states that have simplified their sales tax systems and adopted a certified service provider model to reduce the compliance burden. SST states pay CSPs to handle sales tax compliance for qualifying businesses.
“Congress should either require states to become SSUTA members or to adopt substantially similar protections by a given date in order to continue to enforce economic nexus rules against sellers out of state,” they stated. “Congress could provide two options: membership in the SSUTA, or adoption of significant tax simplification efforts for out-of-state sellers.”
The issue acutely affects small businesses, observed Sen. Crapo.
“This compliance can be time-consuming and expensive, especially for small businesses and for merchants in states that do not levy sales taxes, but that must collect and remit sales tax to other jurisdictions,” he said. “While states and multistate organizations have taken important steps to attempt to ease these burdens, a comprehensive solution to this problem remains evasive. The right of states to levy taxes, and empower their municipalities to do the same, is well-founded on the principle of state sovereignty.”
“On the other hand, as stated in Wayfair, ‘States may not impose undue burdens on interstate commerce,’” he added. “Accordingly, a balance must be struck between ensuring states can collect sales tax due and ensuring that business activity is not stifled, particularly as the risk of recession rises.”
