The Senate Committee on Finance invited five witnesses to address the impact of the Wayfair decision and remote sales tax.
James R. McTigue Jr., director of Tax Policy and Administration for the Government Accountability Office (GAO) said sales tax accounts for roughly a third of state revenue. To date, sales tax collections from remote sellers have exceeded GAO’s 2017 projections.
McTigue said businesses devote a lot of time to discovering and understanding their compliance obligations, in part because effective dates, small seller exceptions, exemptions, and other requirements vary from state to state. For many businesses, purchasing or developing sales tax software is now “essential” for multistate tax collection, and an added cost of doing business. GAO’s written testimony provides additional information.
Craig Johnson, executive director of the Streamlined Sales Tax Governing Board (aka, SST), said the Wayfair decision has brought about “significant changes” for sellers nationwide. He explained how SST strives to reduce the burden of compliance for businesses — something the Supreme Court noted in its opinion. Among other simplification measures, the 24 SST member states provide a central, electronic registration system; simplified administration of exemptions, remittances, and returns; uniform sourcing rules; and uniform state and local tax bases. Member states also provide taxability matrices to help businesses gauge which transactions are subject to sales tax.
Johnson said the SST program is helping thousands of businesses with compliance. More than 18,000 active sellers have registered through SST and more than 100 businesses sign on each month. More details can be found in his written testimony.
Diane L. Yetter, president and founder of the Sales Tax Institute, also addressed the committee. The Sales Tax Institute provides sales tax consultation, education, and resources for businesses worldwide and Yetter is a “proponent of rules that promote equity.” She also believes states should make every effort to reduce complexity for businesses.
Yetter focused on three main points:
Economic nexus has made it harder for some businesses, especially those businesses based in non-sales tax states, for whom sales tax is a novelty. Marketplace facilitator laws have helped reduce the compliance burden for small marketplace sellers. Some states, like Texas, have also taken steps to reduce the burden of local tax collections by instituting a uniform statewide rate for remote sellers.
Compliance burdens exist for all businesses, even marketplace sellers; for example, inventory can give out-of-state sellers a physical presence in a state, resulting in a significant retroactive tax burden. Compliance is particularly challenging in home-rule states, where local governments can self-administer local taxes.
Congress could help reduce the burden on businesses by focusing on fostering uniformity across states while protecting state sovereignty. Congress should encourage participation in SST, especially among the largest states.
See Yetter’s written testimony for additional insights.
Representatives from two small businesses also spoke: John Hennessey, president and CEO of Littleton Coin Company, Inc., and Michelle Huie, founder and CEO of VIM & VIGR Compression Legwear. Both businesses are based in states with no sales tax, so Hennessey and Huie have had a crash course in sales tax compliance since Wayfair.
Neither Hennessey nor Huie proposed eliminating remote sales tax requirements. As Huie wrote in her statement, “I am not here to challenge the payment of sales tax. It’s a major revenue stream for states and the shift to online commerce has changed the dynamics that don’t work for pre-existing regulations. I am here to ask to simplify the process for ecommerce businesses.”
Pain points for Hennessey and Huie include:
Having to register with departments of revenue in multiple states
Remitting to different states at different times
Researching and determining nexus
Finding information about sales tax rates, rules, and regulations
Identifying different exemptions
Expanding tax obligations beyond sales tax (e.g., franchise tax, income tax)
The cost of doing business has increased for both Hennessey and Huie since Wayfair; although sales tax is paid by customers, collecting and remitting it comes at a price.
VIM & VIGR spends close to $50,000 per year in out-of-pocket technology costs and labor to comply with sales tax legislation. Littleton Coin Company spent $225,000 in 2018 on legal and tax experts and software developers to become compliant by 2019, and it now pays approximately $50,000 on compliance activities yearly. The company also spends roughly $40,000 annually, out of pocket, on various business and occupation (B&O), commercial activity, and franchise tax obligations. A looming issue for Littleton Coin Company is a request to remit California income tax.
More than one senator asked Hennessey and Huie to identify how Congress could help reduce the burden of compliance. Their suggestions include requiring:
A centralized clearing house for registration and returns
A centralized system for audits (e.g., one audit for all states each year)
Protection from retroactive tax obligations
A single unified rate per state
Uniform product definitions within states and across states
Uniform product exemptions across states
Hennessey also asked that any new tax requirements be phased in, so businesses would have time to prepare. His company is currently scrambling to comply with Colorado’s new retail delivery fee; announced in May, it takes effect July 1.
Since a common theme from the witnesses was the need to minimize the burden of compliance, especially for small businesses, Johnson was quick to point out that SST was created to do just that. And Huie agreed that SST reduces the burden in participating states. But as Yetter noted, some of the most populous states in the country, including California, Florida, New York, do not participate in SST.
Avalara VP of Government Relations Scott Peterson attended the hearing. He noted that three of the witnesses commented on the complexity created by differing economic nexus thresholds, which surprised him; he thought their comments would be more random.
Of course, economic nexus laws do make compliance more diificult for businesses. “The old physical presence rule created unusual outcomes,” Peterson said, “but the concept was fairly easy to understand and uniform state to state. The economic nexus threshold is the one thing the states could have done uniformly, but they didn't.”
Learn more about Wayfair and sales tax nexus at the Avalara resource center.
Updated at 9:45 a.m.
