Bloomberg Tax
Free Newsletter Sign Up
Login
BROWSE
Bloomberg Tax
Welcome
Login
Advanced Search Go
Free Newsletter Sign Up

Simplification Is a Better Solution for Sales Tax Compliance (1)

Dec. 7, 2021, 9:45 AMUpdated: Dec. 8, 2021, 1:15 PM

Much has been written about sales tax collection across state lines since the Supreme Court’s landmark 2018 decision in South Dakota v. Wayfair enabled states to require remote sellers to collect and remit their sales taxes. Very little of that text is from those of us in the trenches trying to implement the resulting requirements.

We work for a small, family-owned business in Illinois that sells school and office furniture nationwide via catalogs and the internet. Other small businesses throughout the country may only now be starting to realize the expense and effort they will incur to become compliant. We have done it, and it has been a nightmare.

There are at least 12,000 sales tax jurisdictions in the U.S. The sheer volume of different rates, tax bases, reporting requirements, exemptions, holidays, audit requirements, and frequent changes are overwhelming. Worse, there is no one place to turn for answers or assistance.

Conventional wisdom has it that technology, in the form of specialized software, is the best way for businesses to manage this complexity. This software is often touted as readily available, easy to implement, and use and, in some cases, free. Unfortunately, the reality is drastically different.

Addressing Complexity With More Complexity

The problem with the software-driven approach is that it fails to address the underlying structural issues. Instead, it just adds more costs and complexity.

Software is expensive. There is no such thing as “free"—someone pays, whether that is the business directly, consumers indirectly through higher prices, or the state via contracts with software providers, which ultimately means the taxpayer.

Any new software must first be integrated with your existing enterprise software. There may be a plug-in for the e-commerce or accounting software your company uses, but it won’t be free. One size does not fit all, and most “affordable” packages have the fewest features. Need something, like exemption/resale certificate management, that’s not part of the “plan”? That’s extra. Your business will almost certainly dedicate tens or even hundreds of thousands of dollars to custom programming, testing, and support, as well as hundreds or thousands of hours of staff time during the implementation and training phases.

Those figures may seem exaggerated, but they are based on the real-world experiences of companies like ours. In our case, it took almost a year of effort and over $100,000 to get up and running with 44 states and the District of Columbia. We had to defer hiring a national sales manager during that time because of the drain on our resources.

When that’s all done, your business can look forward to continual expenses in support, updates, subscriptions, maintenance, and training. We’re spending approximately $75,000 per year on compliance and still working out kinks in the system.

Complexity breeds greater complexity. Every special district, every sales tax holiday, every change in rates, forms, boundaries, reporting periods, and the like must be accounted for by the software provider—and all that must correlate to a process in your e-commerce and accounting systems.

There are many points of potential failure in every transaction. For instance, two entities in the same building may be subject to two different sales tax rates depending on any number of factors. Maybe only part of the order is taxable—what does that mean for freight costs? Are any services included, such as assembly or tech support, taxable? Is recording an “exempt ID” sufficient, or must you retain a signed certificate? And for how long?

As the seller, you are responsible for collecting the right amount of sales tax and liable if you get it wrong. Not only must your staff collect the correct documentation and input the correct data, but you have to trust the software provider will manage the information correctly in every instance. Unfortunately, you may not find out that you have been doing it wrong until audit time. By then it is far too late.

There Is Another Way

The risks and costs of sales tax management are enormous for small businesses. Every resource devoted to managing sales taxes is a resource lost to productive uses. What if there were another solution?

Instead of trying to manage complexity, why can’t the system itself be simplified? What if remote sellers had the option to collect one rate for each state—decided by each individual state—and remit it all to one central clearing house? Eliminating the burden of complexity would bring obvious benefits to small businesses. Forty-seven rates—45 states, DC, and the Alaska Remote Sellers Sales Tax Commission—would be much easier to manage than 12,000-plus. Having one point of contact would also drastically improve communication and education.

Making compliance simple would also benefit states. The surge in revenue over the past year masks the fact that, as it stands, states have no idea how many out-of-state businesses should be collecting—and many can’t even tell how many actually are. Simplification would also remove the need for thresholds and ease the tasks of administration and audits. State revenue need not decrease; instead, eliminating barriers to compliance should enable all remote sellers to get with the program—and revenue could even increase.

It can be done. An analogous system is already in place for collecting and distributing trucking mileage taxes with the International Fuel Tax Agreement. Texas, Louisiana, and Arkansas have already implemented optional flat sales tax rates for qualifying remote sellers.

Conclusion

There is a better solution than technology to sales tax compliance for interstate commerce: simplicity. However, congressional action is needed to make it happen. Absent Federal intervention, there are no incentives for states to act individually. The MTC’s 2020 report on proposed revisions related to how Public Law 86-272 applies to modern business activities in the current climate can be found here.

As noted in the Multistate Tax Commission’s Hearing Officer’s report, “States are not required to determine whether their taxing power may or may not affect national market activity.” While that sentiment prevails, small businesses will continue to struggle with the overwhelming, expensive burden of remote sales tax complexity.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Linda Lester is VP of K-Log, Inc. where she manages day-today company operations. Her husband, John Lester, works on sales tax compliance for K-Log. Linda has testified before the House Small Business Committee on remote seller sales tax issues. Both are part of the Sales Tax Advisory Committee for the American Catalog Mailers Association, or ACMA.

We’d love to hear your smart, original take: Write for Us

(Added link to additional MTC document, clarified quote)

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com