In the wake of the U.S. Supreme Court’s decision last week to allow states to require out-of-state merchants to collect and remit local sales tax on goods sold to their residents, some e-retailers are questioning what this means to their business.
While larger e-retailers and store operators are applauding the decision, citing how it “levels the playing field” among merchants, small and medium-sized online retailers say the court’s decision leaves too many questions unanswered about how to proceed.
“I was waiting for clarity [from the Supreme Court decision]. I got none,” says Leon Rbibo, president of The Pearl Source, a Los Angeles-based jewelry e-retailer that’s been selling online for 12 years. He says that while the court did its job in ruling on the constitutionality of states’ rights to collect, the question now is, what’s next?
He doesn’t see Congress coming up with a solution anytime soon, which leaves the door open for states to make individual demands of retailers that may be tough to manage. “With the decision in hand, the states now have ammunition, but there is still no guidance or clarity on what small and medium-sized businesses need to do,” Rbibo says. “Tomorrow I might get a call saying you owe me money. It’s dangerous for business.”
“The difficulty with the decision is the Supreme Court has left it up to Congress to come in and enact some rules, and that’s a little scary because to enact legislation will take forever,” says Danny Gavin, vice president and director of marketing at Brian Gavin Diamonds, an e-retailer of custom jewelry based in Texas.
Marc Werner, CEO and co-founder of mattress manufacturer and e-retailer Nature’s Sleep LLC, says the ruling gives larger retailers an advantage and is detrimental to smaller online merchants, citing the cost of compliance. “It’s an incredible burden for smaller businesses and another advantage for the mega names,” he says. “The big guys—the Wayfairs, the Targets—they have armies of people to handle the ins and outs for them. If you’re a $3 million company selling T-shirts online that people from all over the country buy, it’s going to cost you $100,000 to run all the software to collect the proper taxes.”
Werner questions whether the cost and effort of compliance makes business sense. “Sometimes it gets to the point where you don’t know if you want to be in business anymore,” he says. Nature’s Sleep is No. 436 in the Internet Retailer 2018 Top 1000.
Gavin is concerned that, left up to the states, some may try to collect taxes retroactively. “That can put people out of business,” he says.
Next steps for e-retailers
Crystal Landsem, chief financial officer of LuLu’s Fashion Lounge Inc., No. 244, says that while the court’s decision did not go the way the women’s apparel e-retailer had hoped, the fast-growing e-retailer has been preparing. “We have been working really hard the last few months to get our systems upgraded to a point where we could handle the higher level of complexity this decision adds to our business,” she says. “This decision puts stress on businesses, especially small to mid-size high-growth companies, whose systems were not designed to charge different rates across multiple states.” LuLu’s sales have grown at a compound growth rate of more than 35% a year over the last five years, according to Internet Retailer estimates.
Rbibo says anything that takes his company’s focus off of growth is detrimental. “The material impact is the time and the headache. When a significant amount of time is diverted to deal with this administrative garbage, whether it is tax or regulation of any kind, it is a huge waste of time. My job is to grow,” he says.
Rbibo says his immediate next steps will be to work with his tax advisor to review Pearl Source’s sales on a state-by-state basis, prioritizing the states where the e-retailer drives the most revenue. “I think we will start collecting. I do know that if I have a meaningful amount of sales in any state, they are going to want to collect it whether they attack me now or two or three years from now,” he says.
EBay Inc. and Etsy Inc., both large marketplace operators that represent many smaller sellers, are distributing separate petitions intended to spur Congress into answering small business owners’ concerns. The petition Etsy sent to its sellers had more than 13,000 signers as of Monday afternoon. EBay distributed its petition to eBay account holders via email on Friday, encouraging “fair tax policy” for sellers and buyers. EBay’s says it will deliver the petition to select state governors, members of Congress and President Donald Trump.
The decision on the online sales tax may only be the first domino to fall. Jason Boyce, CEO of online sporting goods e-retailer Dazadi Inc., says the court’s ruling has the potential to impact more than just sales tax. “What most sellers, and apparently the [Supreme Court] justices, don’t realize is that collecting and remitting sales tax in states often triggers gross receipts tax and state income tax as well,” he says. This in addition to collecting and remitting sales tax is what will drive up costs for the company, he says.
Dazadi already collects in 30 states. “The sales tax itself isn’t the big deal because the customer pays the tax, we collect it and then remit it,” Boyce says. “The problem is the state income tax, gross receipts tax per state and the accounting and legal fees required first to set up and then maintain them annually. It’s a complete mess.”
Jessica Young, Fareeha Ali and James Risley contributed to this story.Favorite