As if it’s not challenging enough for small business owners to keep up with all the fast-paced changes in the retail industry, a recent Supreme Court ruling has complicated things a bit further. In June 2018, the South Dakota v. Wayfair, Inc., decision paved the way for state treasuries to start collecting taxes from all businesses, even those who didn’t have a physical presence in their state.
For online retailers, this new development has led to confusion over what they should be doing—as well as what’s to come. While many large e-commerce corporations have been collecting state sales tax for some time, smaller sellers are rightfully concerned that compliance with a patchwork of 50 different state tax laws (and hundreds of municipal tax codes) could become an administrative headache.
Wondering how this ruling will affect your small business? Here’s what you need to know.
Some states, like South Dakota, have been poised to take advantage of another tax revenue source for some time. The Court’s ruling was issued in direct response to a drafted South Dakota law that seeks to tax both online and brick-and-mortar companies in the same manner. This level of readiness isn’t the norm for most states, however. It will take some time for new tax laws and collection thresholds to be drafted, passed and implemented—giving businesses a little more time to prepare for what’s ahead.
A few of the largest online global sellers are comprised of millions of small e-tailers, but that doesn’t mean they’ve been left to defend themselves. eBay issued a statement to Congress asking for help drafting regulations that could exempt and protect small businesses from the administrative burden of new state tax laws. Etsy, which encouraged their sellers to share their concerns with Congress via an online petition, is another large corporation that could be looked to for guidance; however, at the time of this article, they have not yet updated their seller tax collection guide to include the details—or consequences—of the new ruling. As more states seek increased tax revenue, these large marketplaces could play an active role in small business advocacy and lobbying.
Keeping tabs on all 50 states’ tax codes may require a professional, but it pays to stay on top of upcoming laws and how they will affect you. South Dakota, for example, included language to exempt smaller businesses from having to collect the tax revenue; only stores that exceed $100,000 in total sales or conduct more than 200 individual transactions to a state’s residents in a calendar year are subject to reporting and paying sales tax. A tiny seller would then be exempt from any new administrative tasks or collecting sales from customers.
As more states follow suit, the expectation is that similar thresholds will be applied. Michigan, which announced it would start collecting sales tax from out-of-state online purchases starting in October, is using South Dakota’s court-tested model as a template. Previously, it was the responsibility of the consumer to report unpaid internet sales tax, an honor-system requirement that largely went ignored. While Michigan’s new treatment of the tax law pushes the collection responsibility to the retailer, it still expects consumers who buy from small, exempt companies to self-report.
While there is a small risk for some states to adopt a retroactive tax-collection policy to gather taxes they may have missed out on prior to the Court’s ruling, it’s more likely that they will want to work with small businesses to seek a partnership that works for the future. One possible outcome is the formation of a standardized tax code, similar to the Streamlined Sales and Use Tax Agreement currently adopted by 24 states, which can create a one-size-fits-all compliance solution that everyone can follow easily.
With mid-term elections just a few months away, it may be difficult to sift through all the noise to find updates on matters of fair tax collection practices. However, smart small businesses should keep their ears open for new tax developments in the states they sell to most and continue to be active in business-friendly groups that have the power to work with Congress for positive change. As brick-and-mortar stores have known for a while now, we really are all in this together.
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