Of all the responsibilities of running a small business, the obligation to collect and pay sales tax may not seem like such a big deal. But for a growing number of small businesses that conduct online sales across state lines, the challenge is real and seems to get more complex every day.
In 2018, 45 states and the District of Columbia – as well as 11,000 local governments – levied a type of sales tax. Unlike other forms of taxation, for sales tax, state and local governments do not collect the tax directly from the end consumer, but require small businesses making sales to register, collect, and remit sales tax to the appropriate Tax Authority. These authorities may also impose substantial penalties for non-compliance.
Until recently, the issue of remote taxing jurisdictions was of little consequence to small businesses as most tended to conduct business in close proximity to their physical locations. With the advent of online sales, however, thousands of small companies now routinely conduct business across state lines, landing them right in the center of complex multi-state sales and use tax compliance.
At issue are the competing needs of government, at all levels, for tax revenues to operate essential public services, local merchants who believe they are unfairly disadvantaged vis-à-vis out-of-state sellers who have an avenue to avoid paying sales tax, and digital commerce advocates who frown upon any obstacles to innovation and growth. But the reality is that those taxes generate more than $500 billion to states each year, which directly support the provision of local services and would be difficult to replace.
The essential aspect of sales tax revenues to the functioning of local government recently propelled the question of taxing out-of-state sellers all the way to the door of the United States Supreme Court.
In the landmark South Dakota v. Wayfair decision last year, the Supreme Court upheld a South Dakota law that requires certain out-of-state sellers transacting business in the state to comply with the State’s sales tax collection requirements. The Court reversed its previous 1992 ruling on the same subject, determining that South Dakota’s argument for levying sales tax on out-of-state sellers was no longer the burden it once might have been on interstate commerce. Not surprisingly, to date, over 30 states have enacted or are now considering legislative proposals that mimic the parts of the South Dakota law that the Court ruled constitutional.
In reaching its conclusion in Wayfair, the Court explicitly called out changes in both policy and technology that alter the environment with regard to a law like that adopted by South Dakota. Justice Kennedy’s majority opinion in the case relied on safe harbors contained in the South Dakota law regarding businesses with small volumes of transactions and other factors, including the State’s participation in the “Streamlined Sales and Use Tax Agreement,” (“the Agreement”) a public-private collaboration for sales tax compliance. In its own words, “The Agreement focuses on improving sales and use tax administration systems for all sellers and for all types of commerce….”
– Joe Crosby, CEO & Principal with MultiState Associates, weighs in on the impact of the Supreme Court’s 2018 Wayfair decision.
Participation in the Agreement is open to all states and, at present, 24 states are part of the collaboration. Private industry, including Intuit, also plays a role by providing expert advice to the Governing Board of the Agreement and by offering certified compliance products and services.
Still, as digital commerce continues to evolve and grow, more will need to be done at the state level to reduce the sales tax compliance burden, particularly on small businesses, so they can continue to prosper, grow and create jobs.
Policymakers hold the keys, but the private sector innovation has a lot to offer. Illustratively, the United Kingdom has established a public-private partnership to leverage private sector technology and marketing expertise to help drive a public adoption strategy for their Making Tax Digital initiative, which launches this spring, focused on VAT compliance.
If small businesses can take advantage of technology and marketplace innovations to automate sales tax compliance rather than expend their valuable manpower and resources replicating those assets, much can be gained and even more can be saved. Public-private partnerships, conducted at no cost to the public purse, offer new models of collaboration and modernization, harnessing the resources of the private sector and applying them to public purpose.
Moreover, the more policymakers can simplify compliance through tax reform and collaboration with other states, the more likely it is that digital commerce will continue to thrive, to the benefit of both small business and government alike.
The public-private formula of the Streamlined Sales and Use Tax Agreement is an encouraging start.