Congress Needs to Act on Internet Sales Taxes
Yes, I know, the "Congress needs to act" subject line is an unusual one for this blog. But great damage is being done on the tax front to businesses and only Congress can mitigate some of the harm.
The taxes in question are sales taxes, and the problem results from a Supreme Court decision that allows states to start collecting sales taxes on interstate internet sales. Eric Boehm of Reason writes:
Heitman and his wife, Carla, have been running Pegasus Auto Racing Supplies since they founded the company back in 1980, out of a two-story building in New Berlin, Wisconsin. Until last year, that meant Heitman was responsible for collecting and paying sales taxes to exactly one place: the Wisconsin Department of Revenue. But thanks to an under-the-radar ruling from the U.S. Supreme Court in June, he's now receiving letters, phone calls, and emails from revenue officials across the country, each wanting a piece of his business
The source of Heitman's frustrations is Wayfair v. South Dakota,which allowed states to collect sales taxes from online businesses located beyond their borders. Many states view the Wayfair ruling as a potential tax revenue windfall in which the taxes are paid by non-residents who can't vote against them. That's why businesses like Heitman's are now facing the chilling prospect of owing taxes in dozens, and possibly hundreds, of different jurisdictions—while being hounded by out-of-state tax collectors.
Since the Supreme Court issued its ruling in June, Heitman has been scrambling to become compliant with tax commissions and revenue departments from coast to coast. He's spent thousands of dollars on new software to help navigate the complexities of state sales tax law, but that's only been so much help. "It almost seems like I have another full time job dumped on me with this sales tax thing," he says. "It's burning me out."
Like most writes, Mr. Boehm actually understates the problem. Because the potential exists not to have 50 new taxing authorities for every sales, but thousands. I have to deal with this every day. I wrote a while back:
Take Arizona, which seems from my experience to be roughly average. The sales tax rate table is 18 pages long in a small font. There are 29 separate rate categories which each have different rates in each of Arizona's 15 counties. My business is in 6 counties and we have 3 rate categories that apply, or 4 if you consider items with no tax as another rate category. This is 24 different state/county sales tax rates we charge. But that is the easy part. Because then there are, in addition to county taxes, 92 different towns and cities that have their own rate tables with up to 29 different rate categories that add to the base state/county rate. Other states such as Washington (rule of thumb -- if the state has no income tax then it has a LABYRINTHIAN sales and business tax systems) have additional overlay taxes such as for transit and stadium districts.
When my company opens a new location, we have to spend hours on the Internet and with maps trying to figure out what sales taxes to collect, and even with good due diligence we sometimes get it wrong and find in an audit we are actually just inside or outside some line where the rate changes (we once had a location 30 miles outside of Seattle on a long dirt road where we found we had to collect the Seattle Rapid Transit tax). Thatcher, AZ is a town of like 4000 people but has its own special sales tax rates -- do you know where the town line is? Well neither do they, because last time I checked they did not have any sort of online lookup system to tell one automatically if the address is inside or outside the town and its sales tax district....
But even after registering in all 50 states, you are STILL not done, because many states don't have a fully unified sales tax collection system. In Arizona, for example, the larger cities require their own registration and monthly reporting. Each of these towns in AZ require a separate registration and monthly report:
Apache Junction, Avondale, Chandler, Douglas, Flagstaff, Glendale, Mesa, Nogales, Peoria, Phoenix, Prescott,Scottsdale, Sedona, Tempe, Tucson
Douglas, Arizona is a town of freaking 16,000 people but make sales there and you have to have a separate local registration and reporting. And this list is for one not-very-urban state. Currently my company does business in 9 states but we are registered and pay sales taxes to about 25 different authorities -- and we are mostly a rural business, so we are not in the larger urban areas that are more likely to have their own sales tax systems.
Apparently Congress is considering legislation to pre-empt this tax burden for all but the largest (read: Amazon) retailers
One potential vehicle for resolving problems created by Wayfair is a bill sponsored by Rep. Jim Sensenbrenner (R-Wisc.), first introduced in October and likely to be re-introduced to the new session of Congress within the coming weeks. His bill, the Online Sales Simplicity and Small Business Relief Act, would add important specifics like prohibiting states from collecting out-of-state sales taxes on transactions that occurred before January 1, 2019, essentially giving businesses much-needed time to get up to speed on the new requirements without suddenly being hit with tax bills they weren't expecting.
Most important of all, the bill would create a $10 million sales tax exemption for all small businesses that do not have a physical presence in a given state. That means upping the $100,000 threshold in the South Dakota law that triggered the Wayfaircase to a level far in excess of what a small business would have in sales—effectively removing the ability of states to target all but the largest of remote sellers.
"Small business owners, in particular, have shared fears that they will be unable to bear the new compliance burdens and may have to shutter their businesses," Sensenbrenner says. "I've heard from online sellers in Wisconsin and across the country who are concerned with the complexity of the post-Wayfair tax regime."
The bill is likely to have bipartisan support in the House this year, with Reps. Anna Eshoo (D-Calif.) and Zoe Lofgren (D-Calif.) lined up as co-sponsors, along with Rep. Jeff Duncan (R-S.C.).
This is actually good news if this law has support. I actually thought that there would be no solution short of a federal sales tax on interstate sales that pre-empts the state rates, and whose proceeds would get shared with the states on some kind of pro rata basis. I didn't think politicians would walk away from money, and I still think that if the Sensenbrenner bill is to pass it needs to do it this year before states get used to the new money and refuse to part with it.
