A House panel next month will consider small business concerns about navigating the patchwork of state laws on sales tax collections for remote sellers and online marketplaces.
The March 3 hearing before the House Small Business Subcommittee on Economic Growth, Tax and Capital Access, is titled “South Dakota v. Wayfair, Inc.: How Mainstreet is Fairing and Whether Federal Intervention is Necessary.”
“It’s complicated, it’s not easy. There is nothing streamlined about this process even in the streamlined states,” said Linda Lester, vice president of the Illinois-based office furniture retailer K-Log Inc.
Lester, one of four witnesses scheduled to give testimony, told Bloomberg Tax her business spent nine months trying to implement the required sales tax software, register in more than two dozen states and begin filing returns. Even after this process, Lester said there are dozens of dangling questions about K-Log’s legal obligations. Moreover, the “free software” she expected through the Streamlined Sales and Use Tax Agreement wasn’t free.
Lester said K-Log has almost zero tax duties in most of the 42 states it sells into because 81% of its sales go to tax-exempt organizations such as school districts and police departments. Still, K-Log must register in most states and account for large numbers of exemption certificates for its customers.
Similar small business complaints are expected from two other witnesses, including Kevin Mahoney, president of New Jersey-based FindTape.com, and Brad Scott, director of finance at Arizona-based Halstead Bead Inc. Jamie Yesnowitz, a state and local tax practice and national tax office leader at Grant Thornton LLP, will also provide testimony.
The Supreme Court’s 2018 Wayfair ruling created a framework for states to collect sales taxes from remote retailers.
In Wayfair, the court tossed the 1992 physical presence standard affirmed in Quill Corp. v. North Dakota, which had limited the ability of states to tax remote sales. The court 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. Retired Justice Anthony Kennedy also suggested a state’s law could pass constitutional muster if the state is a member of the SSUTA.
Since the Wayfair decision, all but two of the states with a sales tax have begun imposing remote sales tax based on a measure of economic activity, instead of physical presence. In addition, more than 30 states have passed marketplace-facilitator laws aimed at online platforms like Amazon and Etsy that host third-party sales.
Arizona Wants Federal Legislation
Members of Congress could be hearing from Arizona shortly on these small business complaints.
The state House of Representatives Wednesday unanimously passed a memorial, HCM 2006, calling on Congress to pass a federal law to govern how states collect sales taxes from remote sellers. The memorial points to a “labyrinth” of state laws imposing unfair burdens on sellers. The Senate unanimously passed an identical measure on Feb. 13.
Uniform national legislation would make tax collection simpler following the Wayfair decision, the memorial says. The memorials, while symbolic, will go to Arizona’s congressional delegation.
Brad Scott, one of the small business owners testifying before Congress, and his wife, Hilary, attended the Senate vote after speaking out about challenges brought by the Wayfair decision. Their 30-person company has spent thousands of hours trying to comply with various requirements, Brad Scott said in a statement.
Ball Game and Concert Ticket Nexus?
To the growing list of online platforms flummoxed by state marketplace facilitator requirements, add web sites that resell tickets for professional sporting events and concerts.
The problem: sports fans and concertgoers who are unable to use the tickets they bought for, say, a New York Yankees-Boston Red Sox game, often use web sites such as StubHub, Vivid Seats and Seat Geek to offload their seats. The seller paid taxes on the face value of the tickets, but now the game is a hot item, selling for twice the original price. What’s the tax amount, and who collects and remits it?
Many state marketplace facilitator laws put the onus for state and local sales tax collection and remittance for such transactions on the platform, Rick Heller, managing director of Multistate Tax at Deloitte Tax LLP in Parsippany, N.J., said in a phone interview Thursday. Those platforms “don’t know what to do” about taxes.
For example, he said, how do they account for the sales tax that was imposed on the buyer in the first transaction for admission to a single event? Can the platform take a credit for the previously taxed face value or must they collect and remit on the full sales price, including platform fees?
“Many of the ticket resale platforms are not handling this consistently right now,” he said, adding he couldn’t identify specific companies. “I’d like to see states provide guidance for this type of situation, including a credit for previously paid sales taxes.”
Revenue Rolling into Illinois
Illinois Gov. J.B. Pritzker (D) is expecting $332 million in new sales tax revenue next year, with a lot of those new dollars attributable to the Wayfair ruling.
Pritzker estimated sales tax collections of $9.04 billion as part of his fiscal year 2021 budget up from an estimated $8.7 billion in the current fiscal year. Illinois’ sales tax revenues grew steadily during the previous year, starting at $7.8 billion in fiscal year 2018 and rising to $8.4 billion in fiscal year 2019. Pritzker, a first-term Democrat, released the revenue numbers Wednesday as part of his annual budget address.
Pritzker attributed the state’s sales tax growth to three Wayfair-inspired tax laws enacted since the high court’s ruling. The first law required remote sellers to begin collecting and remitting use taxes to the state on Oct. 1, 2018, boosting collections during fiscal year 2019. A second law requiring marketplace facilitators to collect and remit use taxes on behalf of their marketplace sellers became effective Jan. 1. A third law requiring all remote sellers and marketplaces to collect and remit the local retailers occupation tax, rather than the statewide use tax, becomes effective Jan. 1, 2021.
Pritzker’s budget said the changes are essential to preserve Illinois’ tax base as consumers shift from traditional retailers to e-commerce sellers.
-- With assistance from Brenna Goth in Phoenix and Tripp Baltz in Denver.