November 9, 2018
The Supreme Court’s October decision in South Dakota v. Wayfair upended decades of established precedent governing state taxation of business. Prior to the ruling in Wayfair, states could only tax businesses that had a “physical presence” within their borders. The court’s decision in the Wayfair case to abrogate the physical presence standard threw all the cards up in the air. While the Supreme Court was unwise to decide as it did in Wayfair, Congress would be wise to step in and lend some semblance of order to the transition.
No sooner had the Wayfair decision been released that states began scrambling to get a piece of the tax pie. Unfortunately, in their haste to draw in as much revenue as possible, states have often made proper procedure and due diligence a secondary concern. Some states, such as Michigan and North Carolina, have not even bothered to draft specific legislation in response to Wayfair, simply relying on administrative action. In total, at least 13 states have announced internet sales taxes without drafting updated legislation.
Such hasty scrambling to access revenue is ill-advised not only for procedural reasons, but also because of the uncertain environment it creates for business. Wayfair has created chaos already, forcing small online retailers previously exposed to one or two tax jurisdictions to face the prospect of complying with as many as 12,000 tax jurisdictions nationwide. Thomson Reuters is estimating that a mere 8 percent of mid-sized businesses are prepared to handle the added compliance burden. Smaller businesses are undoubtedly even less prepared, and vague guidance from tax collection agencies only further blurs the picture.
A bipartisan group of lawmakers in Congress led by Rep. Jim Sensenbrenner (R-Wis.) is working on legislation to address these problems. Rep. Sensenbrenner’s legislation, the Online Sales Simplicity and Small Business Relief Act, would impose a moratorium on enforcement of post-Wayfair state tax laws until at least January 1. By removing the time crunch states are reacting to, Congress would effectively encourage them to take the time to draft proper, well-considered laws.
This Sensenbrenner bill would also prevent states from collecting taxes retroactively. Despite the fact that the Wayfair decision suggested that retroactive collection may be unconstitutional, states like Florida and Massachusetts have already indicated that they are exploring the concept. Retroactive collection, where states collect taxes from before the Wayfair decision even came out, is not only deeply unfair, it is also bad policy. Businesses, particularly small businesses, operate on thin margins — throwing unexpected taxes at them without giving them time to prepare can be catastrophic, not to mention potentially unconstitutional.
Another area where states have been misbehaving is in establishing protections for small sellers. The Supreme Court effectively blessed South Dakota’s rule exempting online businesses with less than 200 sales and less than $100,000 in revenue from within the state. Pennsylvania, Oklahoma and Washington each impose tax obligations starting at just $10,000 in sales — an amount that many truly small businesses would easily exceed. Even a higher $100,000 standard is low when applied to states with economies vastly larger than South Dakota’s, such as New Jersey, but that hasn’t stopped states from pushing the boundaries.
To solve this, Sensenbrenner’s legislation would set a small-seller exception at $10 million in revenue nationwide. The Small Business Administration defines revenue up to $38.5 millionas a “small business” in this sector. That number may seem high, but keep in mind that revenue is not profit — it is the amount of total income for a business before operating expenses. A $10 million threshold would protect most truly small businesses from being forced to comply with the dizzying array of tax laws nationwide.
Small businesses have it hard it enough without having to cope with a sudden shifting of tax rules. Congress must step in and prevent overzealous state tax bureaucrats from causing even more harm, and Sensenbrenner’s legislation is a good start along the road to making sure businesses are treated fairly after the chaos that the Supreme Court has caused.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy education at all levels of government.