The recent U.S. Supreme Court decision enabling states to require that online businesses collect sales taxes in states where the company doesn’t have a physical presence was not a surprise. But it makes me wonder if the successful online distribution business I started nine years ago, Sustainable Supply, would have reached where it is today had I been required to collect sales tax for more than 10,000 tax jurisdictions.
In recent years, as global consumer behavior has changed, it has become clear that the “honor system” of self-reporting online purchases in the United States was not working effectively. In essence, states were losing a significant amount of sales tax revenue because it wasn’t getting collected by the merchant at the time of checkout, nor reported by the consumer when she filed her taxes for the year.
Though the Supreme Court issued its ruling, there’s a lot left to be done. Congress must resolve this complex issue for the foreseeable future. The list of new requirements for small and mid-sized businesses is sure to multiply in the void left between the Supreme Court ruling and legislation.
Those new requirements—collecting and remitting sales taxes for more than 10,000+ tax jurisdictions, accurately accommodating all the states’ different ways of handling tax exemptions, and implementing new tax collection software that carry fees ranging from two to three percent of transaction value—will have a significant impact if Congress doesn’t act quickly.
Bootstrapped from Day One
As I try to plan for how this ruling will impact my business in the next year, I can’t help but first think back nine years to Sustainable Supply’s beginning. The company began in the corner of our son’s playroom with very little upfront cash, during the recession, but with few regulations to overcome. We were a true startup with just my immediate family as employees. Sustainable Supply got off the ground because in 2009 there was little to no barrier to entry.
Establishing a small business that sells to other companies in 2009 required learning how to do many things: create a website, use Google for search marketing, process orders, implement modern enterprise resource planning and inventory management systems, and much more. As many business owners will attest, starting a company and growing it is often a very daunting task, and the number of times it seemed we would fail significantly outweighed the number of times I could predict that Sustainable Supply would become what it is today.
I bootstrapped Sustainable Supply from day one, so I always had to be very strategic when it came to spending more money. As many small businesses can relate, every new expenditure, every new hire had to be carefully considered and necessary. That way, each time we hired a new person we were able to utilize that person’s skills, provide him with a long list of to-dos, and continue to fuel the company’s growth.
Could Sustainable Supply flourish as a B2B provider of building, cleaning, and maintenance products if we had to do it all over again in an economy that results from the recent SCOTUS decision?
In addition to all the complexities of starting a business, what would the requirements of collecting and remitting different sales taxes throughout the country have done to our growth? Would it have made sense to eliminate our B2B focus in favor of B2C because of the added burdens associated with enforcing tax-exemption rules?
Collecting tax for 10,000+ jurisdictions
It’s clear that from day one I would have had to identify and utilize tax collection software. Many tax collection software providers claim that their tools are free for Internet merchants to use; this is one of the main arguments supporting the narrative that tax collection will not pose any new burdens to businesses.
As their stock prices have soared in the days following SCOTUS’s decision, I assume that many small to mid-size companies are right now finding out that the free software is not that free. In fact, the software works much like the free apps you get for your phone, in that they’re free but don’t do what you want or need them to until you pay for the functionality you’re after.
In truth, the tax collection software designed to ease the burden on businesses to collect sales taxes across 10,000+ tax jurisdictions nationwide actually carries two to three percent fees, as noted above. In our industry, five percent net margins would be excellent. In fact, national distributors like Staples and Amazon Business are often reported to have much lower net margins than five percent.
So if a small internet-enabled B2B supplier (like Sustainable Supply in 2009) is producing a four to five percent net margin (and reinvesting those profits back in the company’s growth) and is now faced with a two to three percent reduction in net margin, can that reasonably be described as a significant impact?
If I had to absorb a three-percent reduction in net profits from the start, I can quickly identify three areas of my business that would have suffered tremendously:
- Ability to compete with big-box retailers (who are also B2B suppliers): As a small business, Sustainable Supply cannot sell products at a loss and account for the loss as a potential gain in market share the way Amazon Business and others can. Absorbing the tax collection fees means that a small business will likely be forced to raise prices, a move that eliminates an internet-enabled company’s ability to compete on price. From this perspective, it’s easy to see the SCOTUS decision as a big win for large companies and a loss for potential small business founders and purchasing departments. The decision further stresses a small business’ ability to compete with those companies who have a fleet of tax compliance professionals on staff already. For those companies that will now face a mandatory diversion of resources towards tax compliance, the ability to grow will be affected.
- Hiring: Some of my first investments in employees would have shifted away from growing the business in favor of tax preparedness. Instead of hiring an intern (who is now our operations manager) or a graphic designer (who is now our senior marketing manager) I would have had to pay much more attention to tax collection, audit representation, tax document preparation, and handling tax exemption complexities in every local jurisdiction of every state. 10,000+ tax jurisdictions mean the same number of chances that your business can be fined, penalized, or halted altogether if a mistake is made. That number is severe enough that any business owner would have to prioritize the tax component with resources traditionally allocated to growing the business.
- Infrastructure: We have always dedicated a significant amount of resources to our website, seeking to establish SustainableSupply.com as a top-tier option for procurement departments time and again. We are committed to the user experience and continuously upgrade the functionality of each component on our site. We have spent thousands of hours in development as we have re-platformed a few times, always trying to stay ahead of the e-commerce curve. As an online B2B supplier, those are the steps you have to take to compete. Purchasing agents are continually evaluating the shopping experience that you offer them—and asking, Is this site credible? Do they offer a business rewards program? Can I request a quote, or chat with someone for my order’s shipment status? Moreover, if that person doesn’t like some component of the shopping experience that your website offers, she can quickly go to another site that does answer all of her questions satisfactorily. So if I had to dedicate half of the profit margin to tax collection from the start, it is clear that today I would have a website that struggles to be current, struggles to convince purchasing agents, and struggles to compete with large corporations.
When I consider the implications of the Wild West of sales tax requirements moving forward, it’s clear that Sustainable Supply would have stood a much smaller chance of success in 2009.
As a result, the SCOTUS decision can only be seen as a massive win for the large companies like Staples, Grainger and Amazon Business—and a significant loss for anyone aiming to start a business, for small businesses themselves, and also for purchasing departments that could face higher prices resulting from reduced competition.
Therefore, it’s essential that Congress recognize the potential threat this SCOTUS decision presents and pass legislation that protects small businesses and creates national consistency for online sales tax collection and exemption enforcement.
(This article is Part 1 of a two-part series. Part 2 will analyze the steps Congress can take to improve sales tax collection policies and mitigate the impact on small and mid-size internet sellers.)
Brian Fricano is founder and CEO of Sustainable Supply, an online seller of business and industrial supplies including building materials, safety products, restroom products, and maintenance, repair and operations (MRO) products. Follow him and his company on Twitter @SustainableSply.Favorite