From USA Today/Arizona Republic:
“Supreme Court ruling on sales
tax creates headaches – and expenses – for some small-business owners”
Brad Scott says the business he
and his wife run in Prescott, Arizona, has been consistently profitable,
enjoying solid revenue and many loyal customers around the nation. But for the past year or so, Scott has had
trouble sleeping and spends much of his waking time scouring state government
websites for updates and signs of trouble. The reason? A Supreme Court decision
in 2018 that changed the way businesses must track sales taxes – and exemptions
from those taxes, if applicable – has made it much more difficult for some
businesses to meet their compliance requirements, has increased costs and has
boosted their liability. Scott's company mainly generates wholesale
transactions for which it doesn't collect sales tax – its customers do when
they sell to consumers. When the company receives an order from a new customer,
it must make sure it has the necessary sales tax exemption paperwork on file
for whichever state the customer operates in. Those customers – mainly jewelry
makers – collect sales tax on their retail transactions. His company, as a
wholesaler supplying beads, chains and other materials, must maintain and manage tax exemption
certificates for the various states, even if not responsible for paying any
tax. "It has become an enormous challenge trying to comply with the
different state requirements," Scott said. Hardly a week goes by when his
company doesn't receive a notification from a state revenue department
somewhere alleging inaccurate tax remittances or other problems. What changed
was the way businesses must collect and remit taxes from their retail sales or
manage wholesale exemptions. The court's ruling, in South
Dakota vs. Wayfair, mandates that companies collect taxes in each state where
they generate a certain amount of revenue or number of transactions, even if
they lack a store, warehouse or other physical presence. The amounts vary, but
$100,000 in sales and 200 or more transactions per state is a common threshold.
Even if a business, as a wholesaler, doesn't need to collect and remit sales
taxes, it faces a paperwork burden showing that it complied with each state's
exemption laws. The flip side is that states are capturing more revenue to fund
needed services from remote sellers. For example, in October and November, the
first two months under the new requirement in Arizona, the state collected
$51.6 million from 2,100 out-of-state businesses, the majority of which didn't
previously pay, according to Ed Greenberg, a Department of Revenue spokesman. Arizona
isn't alone. States in general collect more revenue from remote sellers, said
Jared Walczak, co-author of a new Tax Foundation report focused on the issue.
They long were entitled to this money, he said, but compliance has been
lacking.
Local presence no longer required
Before the Wayfair ruling,
retailers often didn't collect and remit sales tax on deliveries to customers
in states where they lacked a physical presence. Nor were exemption
certificates as important. Times have changed, largely because of the massive
inroads made by e-commerce. "Within a year of the June 2018 decision in
South Dakota vs. Wayfair, nearly every state had adopted laws and regulations
taking advantage of the newfound authority to tax remote sales in which the
seller lacked physical presence," the Tax Foundation noted in last month's
report co-written by Walczak. Most states adopted policies requiring
third-party "market facilitators" – entities that don't sell goods
directly but provide a platform for sellers – to collect and remit taxes on
behalf of those sellers. The definition of "market facilitators"
isn't precise and is evolving, Walczak said in an interview. Common examples
include online platforms such as eBay, Amazon Marketplace, Etsy, Google Play,
Uber Eats and Postmates. Arizona is among 37 states that adopted new general
remote sales tax rules as well as those for market facilitators, according to a
Tax Foundation tally.
Myriad state, local rules
Businesses that sell through facilitators
probably will find compliance easier. For other small companies, complexities
have increased. The situation has been made worse in a handful of states,
including Arizona, that allow cities and counties to impose their own tax
rules. As one example, the Tax Foundation cited differing policies in Arizona,
at the local level, when it comes to taxing purchases of fine art. That said,
Arizona has streamlined the retail tax situation, reducing the number of
potential rates and tax complexities that businesses might face. "What
this means in general terms is that the retail tax code has been reduced from
92 separate codes to one tax code, except for certain exceptions,"
Greenberg said. All this places an onus on small businesses such as Halstead
Bead, a 46-year-old family business run by Scott and his wife, Hilary Halstead
Scott. The Prescott firm sells beads, chains and other materials to jewelry
makers, who collect sales taxes. Halstead's only location is in Arizona. On
retail sales Halstead makes, the company collects sales tax, as before. What
changed for the company is the need to apply for and manage out-of-state
exemption certificates, required for wholesale customers, that show those
transactions are exempt from sales tax. There also is the new onus of
interacting with dozens of additional state revenue departments. Various types
of new sales tax software are supposed to help simplify things. Scott said the
versions he has used are expensive and difficult, yielding results that aren't
recognized by tax auditors in all states. Before the Wayfair ruling, Scott
said, the company dealt very little with the revenue departments of states
other than Arizona and wasn't subject to audits by those other states. Its
customers collected tax when they sold jewelry at the retail level. Halstead's
sales predominantly remain tax-exempt because most of the beads and other
supplies are sent to wholesalers, who fashion them into jewelry and collect tax
when they make sales. But the company is responsible for collecting and keeping
on file, for audit purposes, the tax exemption certificates. Scott said he
supports the level playing field created by the new sales tax rules, but he
bristles at the complexities. "Small businesses typically have one person
handling all their accounting and financial needs," he said. Sales tax
issues should fit into that role, not require additional staff, he said. In
Arizona, Greenberg said the Department of Revenue recognized there would be
questions, especially from out-of-state businesses that had not remitted tax to
Arizona before. Among its responses, the department set up an E-Commerce
Compliance and Outreach team to provide guidance and answer questions about the
law, including whether a business needs a license. The ECCO team is available
to assist Arizona companies trying to comply with policies enacted by other
states, Greenberg said in an email.
Burden for Prescott company
Walczak at the Tax Foundation
said he thinks the new compliance burdens are greatest for companies that don't
sell through marketplace facilitators such as Amazon or eBay. The challenges
also are more acute for businesses that conduct a lot of small-dollar
transactions spread around the nation. That largely describes Halstead, for
which rising costs and tax liability woes have been such that the company
considered closing shop, Scott said. It might stop doing business in states
with tax departments and laws that are especially difficult. Walczak agreed
that states overall haven't done enough to ease the burden. "Even in
states that are doing it right, there are complexities … and costs associated
with compliance," he said. Scott figures Halstead incurs about $2.39 in
additional expenses for every $1 it collects in sales taxes. In the aftermath
of the Wayfair ruling in June 2018, Halstead has had more than $162,000 in
costs to collect $68,000 in sales taxes, Scott said. "We have diverted
3,300 hours of time away from our operations to deal with sales taxes," he
said. The main expenses and time drain are in information technology, as
Halstead has needed to integrate its accounting, shipping and inventory
practices with the new sales tax reporting requirements. A survey in October by
the American Catalog Mailers Association reported sales declines and rising
expenses among its members as a result of the new tax obligations. About 89% of
small-business respondents voiced concerns about audits, and companies cited
initial outlays of up to $275,000 for sales tax software and consulting.
Impact on customers, employees
Halstead hasn't lost revenue as a
result of Wayfair and was able to pass along the higher expenses by raising
prices more than 9%. It's unclear how much longer it can keep doing that before
customers balk. The company generates about $6 million yearly in revenue. The
ruling has cost jobs, Scott said. The company let its staff shrink, through
attrition, from 32 employees to 28 over the past year or so. The Scotts want to
accumulate more assets in case they face unexpected financial demands from
state auditors. Sales taxes are considered to be held in trust by a business
for eventual payment to state and local governments. If an auditor assesses a
large tax bill or penalty, the business would need to pay it, virtually
immediately. If business assets weren't sufficient, a firm's owners in some
cases might need to liquidate personal assets such as homes, vehicles or
investment accounts. "We're stockpiling money in case of audits or
fines," Scott said. Halstead hired a specialty law/accounting firm to
conduct an audit of its sales tax practices and, Scott said, received a clean
bill of health. It spent $24,000 in the process. Increased costs for accounting
and legal assistance have been another byproduct of the Wayfair ruling for the
company.
Consistency needed
Scott suspects that many other
small-business owners, perhaps most, "probably aren't aware of their
obligations." If they are aware, they might not want to speak out for fear
of incurring the wrath of state revenue auditors. It remains to be seen if the
various states can adopt policies that help small businesses comply with the
rules without strangling their operations. Congress has the power to change the
law but has been reluctant to do so, Walczak said. States, which are generating
more revenue, don't have much incentive to ask the federal government to get
involved. "Small businesses are in a tight spot," Walczak said.
"They don't have time to Google what each tax rate is for every
transaction," yet they face a host of increased responsibilities.
^ This is one of those times
(non-Civil Rights related) that the US Supreme Court has done more harm than
good. It has placed an impossible burden on small businesses across the country
to not only know every single sales tax amount (local and State) for all 50
States, DC, Puerto Rico, Guam, the US Virgin Islands, American Samoa and the Northern
Marianas Islands, but to collect it with every purchase and make sure that it
gets delivered to the local or State that it is owed to. The Supreme Court has
created a logistics nightmare for millions upon millions of ordinary Americans
and their verdict will help lead lots of people to lose their jobs since they
can not afford to hire a full-time person to keep track of all the different
sales taxes. The Supreme Court was not so supreme in this ruling. ^
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