Online sales tax ruling challenges small businesses
There's still time to slash your tax bill before the year is over; insight from CPA and market analyst Dan Geltrude.
A little over a year and a half after the Supreme Court ruled in favor of taxing online transactions, small businesses are still trying to grapple with the change.
The decision has pushed the tax collection burden onto small business owners, according to the Wall Street Journal.
Small business owners that rely on online sales are trying to navigate and sometimes struggle with the Supreme Court's 2018 ruling for state tax collection.
Nicole Snow, a chief executive of the New York-based online company Good Yarn Inc. told the publication she had to hire a part-time chief financial officer and purchase an updated sales-tax software to comply with the court ruling. The company estimates that it will spend about $25,000 in total this year to collect and remit $90,000 in state taxes on its $5.4 million in sales.
ONLINE SALES TAXES TAKE EFFECT IN THESE STATES
“It’s quite a big lift for us,” Snow told the Journal regarding the 34 states her company has to shell out taxes to. “There is a lot of complexity for a small company.”
In June 2018, the five-to-four Supreme Court decision in the South Dakota v. Wayfair Inc. case, states were given authority to order online retailers collect sales tax even if the companies didn’t have a physical presence within a state, such as a store or a warehouse.
“For example, a business with one salesperson in each state must collect sales taxes in every jurisdiction in which goods are delivered; but a business with 500 salespersons in one central location and a website accessible in every state need not collect sales taxes on otherwise identical nationwide sales,” the Supreme Court said in an issued statement at the time of the decision.
WILL SALT CAP RULING ACCELERATE HIGH-TAX STATE EXODUS?
Prior to the ruling, a “use tax” was supposed to be collected from customers making purchases online. However, not every retail company complied due to the 1992 Quill Corporation v. North Dakota Supreme Court decision that allowed for exemptions if there was no physical presence.
“In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers—something that has become easier and more prevalent as technology has advanced,” the court noted with its revised ruling in 2018.
With the revision, items that get taxed and the frequency each is taxed varies from state to state. Some states allow city and local administrations to apply additional taxes.
INTERNET SALES TAX RULING ‘REBALANCES THINGS’
“Small businesses are definitely the ones that are really adversely affected,” Clark Calhoun, a state and local tax attorney in Atlanta told the Journal. “A bigger business is typically going to have more robust sales-tax software.”
Having access to better tools allows larger businesses to “be well over the sales thresholds every single year.”
Conversely, Verenda Smith, a deputy director of the Federation of Tax Administrators told the Journal that state taxes weren’t meant to impact small businesses. Though, she noted that “the fairness issue is equally on the table, and it can be at odds with the burden issue.”
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In South Dakota, where the case took place, small businesses that make less than $100,000 in sales or have fewer than 200 transactions are exempt from out-of-state taxing. Other states such as California have followed suit, but have differing monetary thresholds.
Additionally, 38 states and the District of Columbia have enacted the Marketplace Fairness Act, which requires e-commerce giants such as Amazon and eBay to collect and remit sales tax for its third-party sellers.
“These bills require out-of-state retailers that have contracts with “affiliates”— independent entities within the state who link to an out-of-state business on their website and get a share of revenues from the business—to collect the state’s sales and use tax,” Max Behlke, a manager at the National Conference of State Legislatures, wrote about the act. “Typically, the website in-state owner is not an employee or agent of the vendor and has no information about what purchases, if any, were made.”
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Despite moves to alleviate tax burdens from small businesses, some online retailers are hurt when customers abandon carts after sales tax is applied to their total – a behavior that has become commonplace due to many consumers not having to pay out-of-state sales tax for over two decades.