In The News

New Sales Tax Standard Affecting Small Business

In South Dakota v. Wayfair, Inc., a landmark case handed down last year, the Supreme Court overturned a 50-year-old standard for collecting sales tax. 

Previously, a business needed to have a “physical presence” in a state—or in other words, a brick and mortar store or production facility—in order to be subject to state sales taxes. However, this ruling broadens the ability of states to levy such a tax.

This ambiguous guideline has caused states to pass varying rules on when and how a sales tax should be levied. The result has had a harrowing impact on small businesses. While large companies may be able to bear the additional–and sometimes complicated–tax burden allowed by the Wayfair ruling, it could cripple small businesses and start-ups that are still working to establish their brand.  

For example, the Kansas Department of Revenue now has no transaction or total sales limit for out-of-state retailers. All sellers, no matter how small their company, are required to collect sales tax. Yes, even including someone selling old belongings on eBay or homemade jewelry on Etsy.

Legislators also have felt pressure to collect more taxes from online sales to prevent local businesses from facing a competitive disadvantage. 

Some states have taken this as an opportunity to increase revenue at the expense of smaller online retailers. Connecticut and Rhode Island have adapted the Wayfair ruling as a “license to tax digital services” like downloads and subscriptions. California has even required third-party sellers on Amazon to pay up to three years of back taxes.

Other states have copied South Dakota and instituted a “$100,000 small business exemption.” But these states haven’t considered how this exemption will apply to their population size. What counts as a $100,000 in South Dakota–a state with a relatively low population density–could translate to $1 million or more in a larger state. It’s reasonable to assume small businesses could hit that threshold, or exceed it, landing them with an additional sales tax as punishment for their success. 

 These interpretations will continue to be adopted differently in each state, making it more difficult for small businesses to operate. In a perfect world, entrepreneurs would be able to depend on a predictable and consistent sales tax system, not subject to a guessing game of ever-changing interstate tax laws.