A Retailer’s Struggle to Survive a Post-Wayfair Sales Tax World

Halstead, an online wholesaler of beads and other materials for jewelry artists, considered closing. For good.

The culprit: It was struggling to keep up with rising costs for collecting and remitting remote sales tax under the new laws that had popped up in dozens of states where its customers are located.

“We are being picked apart by 45 separate state governments,” said Hilary Halstead Scott, president of the Prescott, Ariz.-based company, which does 95 percent of its business in other states. “The situation gets worse every day.”

That murky situation was triggered by the Supreme Court’s seminal South Dakota v. Wayfair ruling, which has opened a new era in remote sales tax requirements in nearly all states with a sales tax. Scott’s company isn’t alone in feeling an impact. On Oct. 23, the American Catalog Mailers Association, which represents online retailers as well as catalog companies, reported that 56% of its members and others responding to a survey said they lost revenue because of the Wayfair decision.

In the June 2018 ruing, the court tossed out its 1992 physical presence standard affirmed in Quill Corp. v. North Dakota, which limited the ability of states to tax remote sales. The majority in the 5-4 ruling suggested strongly that South Dakota’s law, which requires remote sellers to collect sales tax if they have more than $100,000 in sales or 200 transactions to buyers in the state, would pass constitutional muster.

Since the decision, more than 40 states have begun imposing remote sales tax based on economic activity in their state, as opposed to physical presence. In addition, more than 30 states have passed marketplace facilitator laws, which place a duty to collect and remit sales tax on large online web sites such as Amazon Marketplace, eBay Inc., and Etsy Inc. that broker transactions for other, typically smaller, vendors.

Costs Not Trivial

Halstead—with 32 employees and $6 million in gross annual sales—is facing compliance costs that can’t be largely erased through modern technology as some software companies maintain, Scott said. “We’re exasperated by the TaxCloud and Avalara claims that this is a trivial compliance burden for small businesses thanks to the magic of software,” she said.

TaxCloud, Avalara, and other certified software providers offer their tax administration services to vendors for free in states that participate in the Streamlined Sales Tax Agreement, a compact designed to increase uniformity and lower burdens for business, and a handful of non-member states that run their own CSP programs.

Sales tax software solutions provide some efficiencies within the 24 Streamlined member states but problems remain with non-member states, Scott said.

Free help currently available is “far from a complete solution to the new sales tax environment,” Scott said. “As a small business that has implemented an IT sales tax solution, our experience and hard numbers are evidence that the burden remains overwhelming and expensive.”

In addition to paying for a sales tax software subscription, companies face major integration set-up and maintenance costs for that system to work with their internal accounting, shipping, and inventory programs, she said. " The time and complexity of those integrations are consistently glossed over in this debate,” she said.

State Requirements

And then there are rising labor costs.

“Our small staff now handles monthly state notice monitoring, state and jurisdiction data reporting, data analysis, exemption certificate processing, state filings, as well as state correspondence and troubleshooting,” she said. “Now, our customers are paying more for the same products as we absorb these new costs of doing business.”

Halstead has a physical presence in only one state, Arizona. Only 5 percent of its sales are in-state, and only 15 percent of its sales are taxable.

That’s because nearly all its customers are vendors who buy raw materials from Halstead, which they fashion into jewelry to resell to retail consumers. Those vendor purchases from Halstead are tax-exempt, but Halstead must produce a copy of the vendors’ resale exemption certificate should an auditor come to call.

Halstead’s board met in early October to weigh its options, Scott said. It considered closing down, even though the company is profitable and doing quite well, she said.

Product Line Cut

The board decided to stay open, but to raise its prices significantly, again, after a 9.62% hike last year. It also decided to cut a product line that has too much sales tax compliance complexity, she said.

It’s a short-term fix, Scott said. States will have to simplify remote sales tax collection and remittance for small businesses to survive.

“We feel like we are under attack,” she said. “We will continue advocacy, push states to simplify, and hold on for dear life. When so much is out of your control, you just have to forge ahead one day at a time and hope for the best.”

Halstead is a second-generation family-owned C-corp. It doesn’t have a compliance department, a legal team, or a sales tax department. Two states have threatened the company with seizures and legal action, and one state recently nullified its exempt sales.

Hilary’s husband Brad Scott, the company’s finance director, estimates the company spends $2.29 for every $1 it collects and remits in taxes.

The post-Wayfair world “may end up killing us,” he said, “but at least we won’t be going down without a fight.”