The Supreme Court ruling on sales tax is causing some small business owners headaches and costs



Brad Scott says that the company he and his wife run in Prescott, Arizona is consistently profitable and has solid earnings and many loyal customers across the country.

But for about a year now, Scott has had trouble sleeping and has spent much of his time checking the U.S. government websites for updates and signs of problems.

The reason? A 2018 Supreme Court decision that changed the way companies have to track sales taxes – and exemptions from those taxes, if necessary – has made it difficult for some companies to meet their compliance requirements, which increases costs and tightened their liability.

Scott's company mainly generates wholesale businesses for which it does not charge sales tax – its customers do so when selling to consumers.

When the company receives an order from a new customer, it must ensure that the required VAT exemption documentation is available, depending on the state in which the customer operates.

These customers – mainly jewelry manufacturers – charge sales tax on their retail stores. His wholesaler supplying pearls, chains and other materials has to keep and manage tax exemption certificates for the different states, even if it is not responsible for paying taxes.

"It has become a tremendous challenge to meet different government requirements," said Scott. Hardly a week goes by without his company receiving a notification from a government tax authority claiming inaccurate tax transfers or other problems.

What has changed has been the way businesses have to collect and transfer taxes on their retail sales or manage wholesale exemptions.

The South Dakota court ruling against Wayfair states that companies must levy taxes in any state in which they generate a certain turnover or number of transactions, even if they lack a store, warehouse, or other physical presence. Amounts vary, but sales of $ 100,000 and 200 or more transactions per state are a common threshold.

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Even if a company as a wholesaler does not have to collect and transfer sales taxes, it has to do paperwork to prove that it complies with the individual states' exemption laws.

The downside is that states generate more revenue to fund the services they need from remote sellers. In October and November, the first two months of the new Arizona law, the state raised $ 51.6 million from 2,100 non-state companies, the majority of which, according to a Department of Ed Greenberg, had previously made no payments Revenue spokesman.

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Local presence is no longer required

Prior to the Wayfair judgment, retailers often did not collect or transfer sales tax to customers in countries where they were not physically present. Exemptions weren't that important either. Times have changed, mainly due to the massive slump in e-commerce.

After the judgment, the states updated their guidelines.

"Within a year of the decision between South Dakota and Wayfair in June 2018, almost every state had passed laws and regulations that took advantage of the new tax agency for distance sales where the seller was not physically present," the tax foundation said last month report by Walczak.

Most states have issued guidelines that require "third party market intermediaries" – companies that do not sell goods directly but provide a platform for sellers – to collect and transfer taxes on those sellers.

The definition of "market facilitators" is not precise and is evolving, Walczak said in an interview. Common examples are online platforms such as eBay, Amazon Marketplace, Etsy, Google Play, Uber Eats and Postmates.

Arizona, according to a Tax Foundation study, is one of 37 states that have introduced new general rules for distance sales tax and for market facilitators.

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Myriad state, local rules

Companies that sell through intermediaries are likely to find compliance easier. For other small businesses, the complexity has increased.

The situation has gotten worse in a handful of states, including Arizona, as cities and counties can impose their own tax rules. As an example, the Tax Foundation cited different guidelines for taxing art purchases in Arizona at the local level.

Against this backdrop, Arizona has streamlined the retail tax situation and reduced the number of potential tax rates and tax complexities that businesses may face. "In general, this means that the sales tax identification number has been reduced to one tax identification number, with certain exceptions from 92 codes," said Greenberg.

All of this questions small businesses like Halstead Bead, a 46-year-old family business run by Scott and his wife Hilary Halstead Scott. Prescott sells pearls, chains and other materials to jewelry manufacturers who charge sales taxes. Halstead's only location is in Arizona.

The company continues to charge sales tax on retail sales made by Halstead. What has changed for the company is the need to apply and manage exemptions for wholesale customers, proving that these transactions are exempt from sales tax.

There is also the new task of working with dozens of additional government tax offices.

Different types of new sales tax software are designed to help simplify things. Scott said the versions he used are expensive, difficult, and produce results that are not recognized by tax auditors in all states.

Before the Wayfair judgment, Scott said, the company had very little to do with the financial departments of states other than Arizona and had not been audited by those other states. Customers received taxes for retailing jewelry.

Halstead's sales are mostly tax-free as most pearls and other goods are delivered to wholesalers who use them to make jewelry and collect taxes on sales. However, the company is responsible for collecting and storing the tax exemption certificates for audit purposes.

Scott said he supported the level playing field created by the new sales tax rules, but was unsatisfied with the complexity.

"In small businesses, there is usually only one person responsible for bookkeeping and financial matters," he said. Sales tax issues should fit this role and not require additional staff, he said.

In Arizona, Greenberg said the Treasury Department recognized that there would be issues, particularly from non-state companies that had previously not submitted taxes to Arizona. Among the responses, the department deployed an e-commerce compliance and outreach team to provide guidance and answer questions about the law, including whether a company needed a license.

The ECCO team is available to Arizona companies that are trying to comply with other state guidelines, Greenberg said in an email.

Burden on Prescott companies

Tax Foundation's Walczak said the new compliance burdens are greatest for companies that don't sell through marketers like Amazon or eBay. The challenges are also greater for companies that process many small dollar transactions across the country.

This mainly describes Halstead, which is responsible for rising costs and tax problems, so the company considered closing the shop, Scott said. In countries with particularly difficult tax authorities and laws, business could be stopped.

Walczak agreed that overall, the states have not done enough to reduce the burden. "Even in states that do it right, there are complexities … and costs associated with compliance," he said.

Scott estimates that Halstead incurs an additional cost of approximately $ 2.39 for every US dollar sales tax it brings in. Following Wayfair's decision in June 2018, Halstead had more than $ 162,000 in costs to collect $ 68,000 in sales taxes, Scott said.

"We deducted 3,300 hours from our business to regulate sales taxes," he said.

The main cost and time is spent on information technology because Halstead had to integrate accounting, shipping, and warehousing practices into its new sales tax reporting requirements.

A survey by the American Catalog Mailers Association in October showed declining sales and increasing expenses among its members as a result of the new tax obligations. Approximately 89% of small business respondents expressed concerns about the audit, and companies reported initial spending on sales tax software and advice of up to $ 275,000.

Effects on customers, employees

Halstead lost no revenue from Wayfair and was able to pass on the higher expenses through price increases of more than 9%. It is unclear how long this will be possible before customers resist. The company has annual sales of approximately $ 6 million.

The verdict cost jobs, Scott said. The company shrank its workforce from 32 to 28 employees last year. The Scots want to accumulate more wealth if they are exposed to unexpected financial requirements from government auditors.

Sales taxes are held by a company as a trustee so that they can be paid to state and local governments if necessary. If an auditor finds a large tax bill or penalty, the company would have to pay it almost immediately. If the business assets are insufficient, in some cases the owners of a company may have to liquidate personal assets such as apartments, vehicles or investment accounts.

"In the case of audits or fines, we store money," said Scott.

Halstead hired an attorney / accountancy firm to review sales tax practices and, according to Scott, received clean health records. There was $ 24,000 in the process. Increased accounting and legal expenses were another by-product of the Wayfair decision for the company.

Consistency required

Scott suspects that many other small business owners, perhaps most of them, "are probably unaware of their duties." If they are aware of this, they may not want to speak out for fear of the anger of state auditors.

It remains to be seen whether the various states can adopt strategies that enable small companies to comply with the regulations without affecting their business.

Congress had the power to change the law, but it did not, Walczak said. States that generate more revenue have little incentive to ask the federal government to get involved.

"Small businesses are in a tight spot," said Walczak. "You don't have time for Google to determine the tax rate for each transaction."

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