In the wake of the U.S. Supreme Court decision regarding online sales tax—to allow state and local governments to require many more online merchants to collect and remit sales tax whether or not they maintain an in-state physical presence—substantial harm for small businesses will follow unless the U.S. Congress takes action to fill the void left behind.
I previously outlined how this decision, coupled with inaction by Congress, would have severely hampered my ability to start Sustainable Supply in 2009 and continue to grow the business through bootstrapping efforts.
In 2009, this decision would have been a start-up killer for businesses like Sustainable Supply—and it is today, too. Our ability to compete with large companies like Grainger, Staples, and Amazon Business on price would have been eliminated through the three percent fees associated with tax collection software. The resulting higher prices—or cut in in net profit margin—would halt any small company’s growth and present a significant barrier to entry for those trying to establish themselves.
Hiring would have shifted away from positions that enabled our growth and toward those that would not, such as tax compliance and audit representation. Expected tax-exemption enforcement requirements would have further eroded my ability to hire the right people at the right times.
In the world of e-commerce, the website you began with in 2009 was woefully outdated just a couple of years later. Delivering a professional B2B website that purchasing agents find as useful and credible as your large corporate competitors’ requires a continuous allocation of resources. The resources siphoned away by tax collection and exemption enforcement inevitably would result in a website and enterprise resource planning system incapable of competing with the large companies celebrating the recent SCOTUS decision.
Moving forward, the added tax regulations that are on their way will prevent many independent janitorial, office supply, and maintenance, repair and operations (MRO) distributors like Sustainable Supply from expanding their footprints into other states or expanding altogether. Such B2B companies face a much more significant burden than direct-to-consumer companies because of the tax exemption regulations that are the other side of the tax collection decision.
Chief Justice John Roberts noted in his dissent that the U.S. has more than 10,000 unique tax jurisdictions. He also noted how seemingly random those regulations can be, using an example from Texas where deodorant is subject to tax, but deodorant with antiperspirant is tax-exempt. Small to mid-size B2B companies will also be asked, as a part of the collection process, to know what’s being done with the products we sell as a function of usage-based exemptions or entity exemptions. States even have differing requirements for the documentation a B2B seller must collect.
The Main Street shops that are widely reported to be the winners of this decision will soon find their real competition was never the small to mid-sized internet-enabled businesses, but rather Amazon, Walmart, and other brick-and-click large chains that—because of their nation-spanning networks of physical facilities like stores and distribution centers—have been collecting online sales taxes for years. Instead, faced with growing pressure from the change in consumer behavior, the Main Street shops will soon identify, if they haven’t already, that they can sell their wares far beyond Main Street and into states next door or across the country.
But how will those Main Street shops expand their businesses through online sales with all the new layers of tax complexities? It’s more likely to lead to a decrease in competition in both B2B and B2C markets, further handing over the big win to Staples, Amazon, and their peers.
The SCOTUS decision has laid the groundwork for a Wild West of tax collection and exemption requirements across 10,000+ state and local jurisdictions to take hold in the months before any action is expected of Congress, mostly because of the mid-term elections.
In fact, when I met with several key members of Congress in this spring to advocate that our government should step in immediately following the Supreme Court decision, a few members told me that nothing at all would happen on this issue until well after the mid-terms. They seemed to imply that their colleagues wouldn’t want to wrestle with new tax collection regulations or topics related to small businesses in the months running up to an election.
Some Senators have already declared that Washington should take a back seat and let the states establish their own requirements.
Nothing could have crystallized my concern more. But then it took Wisconsin only 15 days after the Supreme Court ruling to declare that it would begin requiring out-of-state sellers to collect online sales tax revenue as of Oct. 1—leaving merchants only two short months to prepare. Illinois followed suit and will also require tax collection starting on Oct. 1, and Iowa will start in January. The list goes on.
Those are the impending results of the SCOTUS decision without any action taken by Congress. Congress has the authority to regulate commerce among the states and can choose to support all businesses by creating a national model for online tax collection and exemption policies.
The states are right to expect sales tax revenue from online purchases, but I call on Congress to listen to small and mid-sized companies to balance that expectation with the needs of the companies who are so vital to the economic health of our country.
Congress should enact legislation with the following provisions to protect small, online businesses:
- Delayed implementation—While it would appear that states have already begun to take matters into their own hands, fairness would require giving companies a chance to prepare for the changes. Wisconsin needs to realize that it is just one state among the 45 plus the District of Columbia with a state sales tax, each with different timelines, requirements and definitions. A business selling to all of those states will likely need to drop everything and begin preparations immediately. In the case of Wisconsin, two months might not provide a fraction of the time necessary to interview, contract with, and integrate tax collection software with our ERP system. Congress should step in and impose a 12-month delay for any new tax collection requirements.
- Robust small-business exemptions—The Affordable Care Act defines a small business as a company with fewer than 50 employees to be exempt from the law’s requirements. The U.S. Small Business Administration has varying definitions of a small business depending on the industry. No matter the definition, the consensus is that a company’s employee count should determine whether a company qualifies, not revenue or number of orders taken. Congress should adopt the ACA’s definition of a small business to be exempt from tax collection requirements. The same employer should not have to use one definition for health insurance and a different definition for tax collection requirements.
- Establish a national flat rate for online tax collection—Examples are endless of how chaotic it can be to deal with 10,000+ unique tax jurisdictions. The expenses associated with collecting, audit risk, and exemption enforcement are unfairly burdensome; they hand a significant advantage to large corporations and their large staffs that are not over-burdened by 10,000+ tax jurisdictions. With a national flat rate, online tax collection would be remitted to the federal government for distribution to the states. If approval for a national flat-rate can’t be won, then states should be allowed to establish one rate per state, which would reduce the burden of 10,000+ jurisdictions to 45. Additionally, companies should only have to report gross sales once per month, and the federal government or state government must then distribute the funds locally. Congress must simplify the collection process.
- Require international sellers who do not have a physical presence in the U.S. to collect online sales taxes—Currently, an international seller doesn’t have to collect sales taxes, but as of Oct. 1, a 20-person company selling toilet partitions to a mom-and-pop restaurant six states away, will have to collect it. Instead of exempting international sellers, it makes more sense to exempt American small businesses while offsetting that exemption by requiring international sellers to collect sales taxes. Congress should exempt American small businesses instead of international sellers.
While the Supreme Court decision was expected, so too is action by Congress. The Wild West of tax collection requirements is about to begin, and it appears to be dangerous for small and mid-sized businesses if legislators fail to do their jobs.
(This article is Part 2 of a two-part series. Part 1, “Free from costly sales tax collection, my startup grew,” covered how Sustainable Supply developed its business after launching in 2009.)
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.