The Wayfair burden on small businesses
The Supreme Court’s 2018 ruling in South Dakota v. Wayfair has had momentous ramifications across the board as states, tax practitioners and businesses adapt to the burdens it generated, and the House Committee on Small Business Subcommittee on Economic Growth, Tax, and Capital Access recently held a hearing on the decision’s impact.
The states lost no time in reacting to the decision, Grant Thornton principal Jaime Yesnowitz, testifying on behalf of the American Institute of CPAs, told the committee.
“Collectively, we have seen swift and dramatic state legislative and administrative responses to Wayfair, but such responses are not entirely consistent from state to state,” he said. “Almost every state imposing a general sales tax has adopted some form of economic presence requirement on remote sellers through new statutes, regulations, and/or policy. About half of the states adopted the same alternative economic thresholds at issue in Wayfair — more than $100,000 in sales or at least 200 separate transactions to the in-state market will subject a remote seller to the sales tax. The other half of the states have adopted discrete variations on what constitutes economic presence subjecting a remote seller to the sales tax, including: higher thresholds of $500,000 (such as California and Texas); a requirement that both the transaction and sales thresholds are met (such as Connecticut and New York); or currently in at least one state, Kansas, economic presence once the first sale is made to an in-state customer.”
And there is significant lack of uniformity in determining how and when economic thresholds apply, Yesnowitz indicated: In calculating the economic threshold based on sales, for instance, some states count only the amount of taxable sales that remote sellers have made to a state’s customers, leaving the exempt sales out. “Other states use the aggregate gross sales amount,” he said, “raising the possibility that a remote seller must register (unless a state says otherwise), even in the case where the vast majority of the remote seller’s sales are not subject to the sales tax because the item is for resale or subject to an exemption. Other states may specifically exclude sales for resale, but not other exempt sales, in the gross sales calculation.”
“And since states adopted these provisions independently, different enactment and effective dates result in a lack of uniformity with respect to when each rule begins to apply, which forces taxpayers to navigate different implementation dates from state to state,” he said.
Moreover, the decision has inspired states to adopt economic nexus legislation that goes well beyond the sales tax issues addressed in Wayfair, Yesnowitz said. He noted that most of the states that impose a sales tax have also adopted marketplace facilitator legislation, under which remote businesses that facilitate transactions on online platforms, often between unrelated purchasers and sellers, are required to register, collect and remit sales taxes on these transactions.
“And since Wayfair, a number of states including Massachusetts, Pennsylvania and Hawaii, have adopted legislation or policy imposing economic nexus standards subjecting remote businesses to income taxes,” he said.
The end result is prohibitively expensive and time-consuming sales tax compliance on small businesses, according to Yesnowitz. “If left unchecked, the lack of uniformity in which the states have reacted to Wayfair could impair the ability of small businesses to grow, result in a loss in productivity that impairs the economy as a whole, and hamper their accountants’ ability to efficiently and effectively serve them,” he said.
The AICPA suggests that a reasonable balance be set between the states’ rights to tax income and sales within their borders, and the needs of individuals and businesses to operate efficiently.
There are currently three bills in Congress that seek to respond to the situation in one way or another, according to Yesnowitz: the Online Sales Simplicity and Small Business Relief Act; the Stop Taxing Our Potential Act; and the Protecting Businesses from Burdensome Compliance Cost Act.
The proposed bills address the Wayfair fallout by reinstituting a physical presence standard, by prohibiting retroactivity, or by setting a national sales threshold.
“A couple of these were offered up both before and after the Wayfair decision,” Yesnowitz noted. “A lot of folk endorsing those are from non-sales tax states.”
“It will be difficult to pass any tax legislation in an election year,” he told Accounting Today. “Having said that, the fact that the subcommittee is taking on the issue at least offers small businesses a glimmer of hope that Congress could intercede. The actions of the states over the past 18 months since Wayfair was decided have really put this front and center for small businesses that need to react.”
Scott Peterson, Avalara’s vice president of U.S. tax policy and government relations, agreed.
“The small-business witnesses [at the hearing] were caught off guard by the Wayfair decision,” he said. “They’re representative of small businesses caught by surprise, and are still figuring out what to do and how to do it.”
One of the witnesses described how complicated it is for the small business to not collect taxes. “The point is very valid,” said Peterson. “Most states use a ‘gross sales’ mechanism, which measures every sale. This creates situations where businesses may make very few taxable sales but must still maintain exemption certificates and report non-taxable sales. Wholesalers have to get sales tax licenses even if they don’t charge sales tax. At some point the states should evaluate how they determine who is subject to any kind of reporting requirement.”
“Model legislation uses the phrase ‘gross sales,'" Peterson noted, “so a lot of states picked up on it. States should find new terminology for ‘gross sales.’”
Peterson doesn’t believe anything will happen at the federal level to ameliorate the situation, noting that current thinking is to get rid of the sales tax or switch to one rate across the board.
“These ideas have been rejected since 1994,” he said. “Historically, state lawmakers don’t want to be responsible for taking away local control over sales tax collection. One-third of sales tax collected in the U.S. is local.”
What can Congress do?
“It was very gratifying that Congress is listening to witnesses that are suffering the pain,” said George Salis, a tax attorney and principal economist and tax policy advisor for Vertex Inc., who attended the hearing. “They are the lowest taxpayers on the totem pole. They have to put up with complicated state regulations and tax complexity. The law looks fluid and uncertain to them. Large taxpayers can afford a staff of tax lawyers and CPAs, but small businesses barely have enough for an outside CPA and lawyer, if at all. The hearing was preliminary troubleshooting to see if and how Congress can fix the situation.”
“The question is, what kind of intervention can Congress provide that would be lawful, that wouldn’t violate the Commerce Clause? The chairman and ranking member on the subcommittee are looking for a simple, straightforward solution,” he said. “That kind of solution would have to come from the states themselves.”
“It’s been 18 months since the Wayfair decision, and everything is still unaligned,” he observed. “Wayfair, at this moment, is favoring the states, and large taxpayers that have the staff and can afford software, but the small businesses are being left out. We’re passing the burden on to taxpayers that can’t afford it.”
Meanwhile, an additional trend is developing among states looking to leverage the ability to increase their revenue in the wake of Wayfair. A proposed bill in the West Virginia Senate requires marketplace facilitators to collect and remit all municipal lodging taxes. This is significant because, to date, platforms like Airbnb and VRBO have only collected and remitted state lodging taxes, leaving municipal taxes as the responsibility of short-term rental hosts. West Virginia is clearly looking to collect more revenue from a single marketplace source.
“This is the latest in a trend,” said Pam Knudsen, director of compliance services at Avalara.
“Airbnb and VRBO already remit on behalf of property owners in West Virginia,” she said. ”In numerous cases, marketplaces realize this is coming and have done voluntary compliance agreements with local jurisdictions to collect and remit on their behalf. Marketplaces have thus far mostly collected state but not local tax, so this is the big change. Where demand is high enough, marketplaces have voluntarily decided to collect and remit on behalf of locals ahead of any legislation or mandate to do so.”
“This simplifies the tax remittance process to get it from a single platform rather than from thousands of property owners,” she explained. “But it adds a level of complexity for property owners if the marketplace platform is only paying state taxes, but not local lodging taxes.”