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US Supreme Court ruling on sales taxes hurts smaller businesses

A case study

Vince Kadlubek was originally happy enough when he heard of the Supreme Court ruling. He is CEO of the art collective Meow Wolf and his group brings in about $12 million a year with most coming for admissions to his New Mexico art attraction. He sells most of his admission tickets online. Kadlubek was fine with helping the state gain more revenue.

Then he heard that it could mean collecting sales tax revenue from other states as well. Kadlubek then said to NBC news: “This is going to be a headache. That makes me really think twice about whether or not we push online sales as a component of our company. I’d much rather have people buy their tickets at our front desk and keep the tax local.” Perhaps, Kadlubek could simply limit online sales to residents of New Mexico.

It may be difficult and costly for Kadlubeck to comply as many states will demand that online sellers in other states collect sales tax from buyers in their states. The estimates of the amount of sales tax lost to sellers outside of a jurisdiction is from $8 billion to $33 a year according to the Supreme Court decision.

Reaction to the ruling is mixed

Companies with a physical retail presence in states have cheered the decision since before they were at a competitive disadvantage with online sellers. Tom McGee CEO of the International Council of Shopping Centers said: “We think this levels the playing field and promotes competition. We’ve been operating in a system where we’ve been at a competitive disadvantage.”

States also will no doubt welcome the ruling as it should increase their revenues from sales taxes. It remains to be seen if the ruling has much of an effect on online sales. If people bought in stores they would have to pay the state tax anyway and it may be convenient and often cheaper still to buy online. However, some small businesses may decide there is too much hassle in collecting the tax and curtail their online operations.

The use tax

Many states have a use tax equivalent to the sales tax that applies to online purchases but most online businesses do not comply with it. Rocky Cummings of BDO the accounting, tax, and advisory firm said: “There was very little voluntary compliance with the use tax. If you have a million residents buying stuff online, you’re not going to chase a million people. It’s much easier to go after the seller to collect it all.”

At most, the additional revenue will add 5 to 7 percent to annual revenue, according to John Mikesell, of Indiana University’s School of Public and Environmental Affairs. However, it will be good for state budgets.

Big players will be affected

Large online sellers such as Amazon, Walmart, and Target frequently collect states taxes but not local taxes. The ruling opens the door to their having to worry about local taxes according to Mikesell. Yet large businesses have technical advantages that make the change much less burdensome for large businesses and so are comfortable with the change overall.

A statement from the large retailer Target said: “We are pleased the Court’s ruling will close the loophole that has allowed online-only retailers to avoid collecting and remitting sales taxes while still requiring local businesses to do so.”

Small and medium size businesses are most negatively impacted

These business are faced with a huge problem because compliance is complicated. Darcy Kooiker of the national tax firm Ryan notes:. “Each state gets to determine whether the products, goods, and services sold by the sellers should be subject to that state’s sales tax. Part of the biggest challenge for the sellers is to know in each particular state if its goods and services are subject to sales tax, because there’s no uniform definition.”

Some states have exemptions for collecting sales tax. In North Dakota for example a seller can sell up to $100,000 or 200 transactions with no tax.

Allen Walton CEO of , an online seller of security equipment complained: “This makes life very difficult for people like me. Now I have to keep track of the tax laws and collect and report tax in 50 states and over 3,000 counties.”

Chris Cox, a lawyer for e-commerce industry group NetChoice, claimed that small businesses would be most affected: “Consumers will quickly feel the negative effects as those businesses dry up or are forced into the arms of Internet giants.”

Hart Posen an associate professor at the Wisconsin School of Business thinks that the decision can be a boon for Amazon. Many small online sellers may use Amazon’s platform as it will collect and remit sales tax for them.

A number of states have already legislation that will trigger sales tax collection should the Supreme Court decision allow it, as it has. This means companies must comply right away or risk an audit and fines from different states. Forty five of the 50 states impose sales taxes.

The Supreme Court Decision

The ruling pitted several retailers against the state of South Dakota: “The justices, in a 5-4 ruling against Wayfair Inc., Inc. and Newegg Inc., overturned a 1992 Supreme Court precedent that had barred states from requiring businesses with no “physical presence” in that state, like out-of-state online retailers, to collect sales taxes.”

The ruling authored by Justice Anthony Kennedy revived a 2016 law that required larger out-of-state e-commerce companies to collect sales tax a law that retailers fought in court. Kennedy said that rejecting the physical presence rule was needed to ensure that an artificial competitive advantage was not created by court precedents.

The ruling led to Wayfair stocks declining 3.8 percent while Overstock lost 2.1 percent. Even Amazon fell as much as 1.9 percent even though it may eventually benefit from the decision.

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