Jamie C. Yesnowitz
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On March 3, 2020, the U.S. House of Representatives’ Committee on Small Business, Subcommittee on Economic Growth, Tax, and Capital Access, held a hearing to consider the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc.
and its effect on online sales tax collections by small businesses.1
During the hearing, the subcommittee heard witnesses discuss the Wayfair
decision, how the case has been applied by the states and its impact on small businesses. One of the authors of this alert, Jamie Yesnowitz, testified at the hearing on behalf of the American Institute of Certified Public Accountants (AICPA). The hearing included recommended legislative solutions by the AICPA for Congress to consider if it decides to pursue state tax simplification in response to Wayfair
, the U.S. Supreme Court overturned the long-standing “physical presence” nexus standard previously established under Court precedent.3
With this decision, the Court endorsed a South Dakota statute requiring remote sellers to register, collect and remit sales tax if they meet at least one of two economic thresholds in the prior or current calendar year – gross revenue from sales delivered into the state exceeding $100,000, or engaging in at least 200 separate transactions involving items delivered into the state.
State responses to Wayfair
As explained in the written statement submitted by the AICPA,4
almost every state imposing a general sales tax responded to Wayfair
by adopting some form of sales tax economic presence requirement on remote sellers. However, there has been a lack of uniformity on the level of economic thresholds. Approximately half of the states adopted the same alternative economic nexus thresholds at issue in Wayfair
, with the other half adopting discrete variations on what constitutes economic presence subjecting a remote seller to sales tax. Also, there is a significant lack of uniformity in determining how the economic threshold tests are satisfied and when remote sellers need to comply with the sales tax. Finally, states have expanded economic nexus beyond Wayfair
, by enacting marketplace facilitator legislation5
along with legislation or policies imposing economic nexus standards that subject remote sellers to corporate income taxes.
Issues for small businesses following Wayfair
The AICPA’s written statement discusses the prohibitive expense of new sales tax compliance obligations on small businesses. The statement concludes that as a result of the remote seller and marketplace facilitator rules, it is much more expensive and time-consuming for small businesses to comply and ensure that the correct amount of sales tax is paid to state and local jurisdictions. There also are unnecessary sales tax registration requirements for businesses making exempt or minimally taxable sales. Furthermore, the new rules are particularly problematic for small businesses that sell through their own websites, as well as through unrelated online marketplaces. These remote sellers must determine and navigate burdensome compliance obligations under both the remote seller and marketplace facilitator rules that most states have adopted. According to the AICPA’s testimony, small businesses do not have the necessary resources, revenue or time to accurately comply with the inconsistent and varying compliance obligations across the nation.
AICPA’s recommended legislative solutions
The AICPA’s written statement provides several recommendations for Congress to consider if it decides to address state tax simplification for small businesses, suggesting consistency between sales and income tax nexus rules. Specifically, Congress could address the minimum standards for which both the sales tax and income tax could apply to remote sellers. The AICPA recommends using the model factor presence nexus standard established by the Multistate Tax Commission (MTC) in 2002 for business activity taxes as a starting point for determining economic nexus thresholds.6
Because the MTC has not amended its standards since 2002, the AICPA recommends the following update of the uniform minimum economic nexus thresholds that states could apply in a consistent manner for both sales and income taxes: (i) one designated threshold amount of taxable sales (for sales tax) or gross sales (for income tax) in the state;7
(ii) $100,000 of property located in the state; or (iii) $100,000 of payroll located in the state.
Beyond the nexus thresholds, the AICPA makes several other legislative recommendations. The AICPA advocates clear and consistent definitions for marketplace facilitators, as well as guidelines for effective tax administration that would ease the burden on small businesses and accountants. The AICPA also recommends standardized time periods for measuring economic nexus thresholds. Due to the compliance complexities, any federal legislation should provide an automatic 90-day grace period before a remote seller is required to register to collect and remit the sales tax. Finally, the AICPA recommends that Congress encourage states to provide easily accessible taxability matrices updated on a regular basis to promote uniformity, certainty and transparency.
Chairman Rep. Andy Kim (D-N.J.) and Ranking Member Rep. Kevin Hern (R-Okla.) conducted the subcommittee hearing. In addition to Jamie Yesnowitz, Linda Lester of K-Log, Inc.; Kevin Mahoney of FindTape.com; and Brad Scott of Halstead Bead, Inc. all provided testimony from the perspective of small businesses dealing with the effects of post-Wayfair
Chairman Kim opened the hearing by noting that Wayfair
overturned approximately 50 years of precedent and complicated tax compliance for online sellers. Also, Chairman Kim stressed that the case has placed excessive burdens of time and money on small businesses. He stated that small businesses should not be required to act as the taxing arm for thousands of local tax jurisdictions. Ranking Member Hern noted that Wayfair
has changed the landscape of taxing interstate transactions and acknowledged the burden placed on small businesses. Following Chairman Kim and Ranking Member Hern’s opening statements, each witness presented a five-minute oral statement to the subcommittee.
Mr. Yesnowitz, testifying on behalf of the AICPA, noted the lack of uniformity on the level of economic thresholds between states, as well as when they apply. He also explained that small businesses are often confronted with prohibitive costs in ensuring their compliance is performed correctly. Based on the state legislative and policy provisions adopted following Wayfair
, Mr. Yesnowitz recommended using the MTC factor presence nexus standards as a starting point in addressing remote seller nexus policy.
Ms. Lester stated that she is not opposed to collecting sales tax, but emphasized the difficulty and expense associated with meeting the compliance obligations. While she has heard many times that a streamlined process with free software available exists to assist with compliance, she explained that this is not streamlined or free. According to Ms. Lester, a solution to this sales tax collection burden should include: (i) one rate per state; (ii) a single filing point for all states; (iii) time to implement the process free of penalties; and (iv) a comprehensive program to educate businesses and consumers of the change. Mr. Mahoney noted the difficulty in selling products through online marketplaces. He stated that a state audited his company because a shipment went through a marketplace’s fulfilment center in the state even though his company had no in-state sales. In addition, he noted that the sales tax nexus transaction thresholds do not account for businesses that sell items with low prices. Mr. Scott urged for federal intervention because compliance obligations are too great for small businesses to endure.
Following the testimony, Chairman Kim and Ranking Member Hern asked the witnesses three rounds of questions. In response to Chairman Kim’s question of whether $100,000 in sales is a good standard for sales tax nexus, Mr. Yesnowitz reiterated that the AICPA suggests a much higher sales threshold, perhaps as high as $750,000 or $1 million based on the MTC’s factor presence nexus standard as adjusted for an inflation component. Ms. Lester replied that the nexus requirement should be replaced by a uniform national standard. However, if a threshold is needed, she recommended a $1 million threshold. Mr. Mahoney advocated for the elimination of the transaction threshold. Mr. Scott called for the elimination of the state thresholds in favor of a national standard.
Chairman Kim asked Ms. Lester which states are the easiest from the perspective of compliance, and which states are the most difficult. She highlighted Texas and Louisiana as states that at least provide the option of complying with either a particular local jurisdiction or applying a state rate. She replied that Colorado had the most difficult compliance requirements. Mr. Scott responded that his business does not sell items in Colorado due to the state’s numerous local taxing jurisdictions. Ranking Member Hern asked Ms. Lester why Texas and Louisiana have a single rate option. Ms. Lester replied that she believed the option may be intended to improve compliance. She did not think that a single rate option would be sufficient to reduce the compliance burden because major complexities in the nexus requirements would remain. Ranking Member Hern asked whether the federal government can oversee state taxes to correct these issues. Mr. Yesnowitz replied that the federal government has jurisdiction to intervene on state tax policies (invoking Public Law 86-272 as an example).
, states have been extremely active in adopting sales tax collection requirements for remote sellers and marketplace facilitators, resulting in a substantial compliance burden for these entities. This burden is particularly serious for small businesses that have limited resources. The state activity in this area has posed challenges for tax practitioners as well, who have gone to great lengths to learn about and continually track developments to inform and assist their clients.
The fact that a House subcommittee held a hearing to discuss these complex issues and consider possible solutions broached by the AICPA and small businesses is encouraging. Hopefully, Congress will continue to consider possible federal legislation to simplify the sales tax collection obligations for remote sellers, while taking into account the principles of equity, fairness and effective tax administration highlighted in the testimony provided at the hearing.
In contemplation of potential federal legislation in this area, it should be noted that at least three bills already have been introduced in the current Congressional session, which the AICPA has not endorsed or opposed. The Online Sales Simplicity and Small Business Relief Act would prevent states from imposing a retroactive sales tax collection obligation on remote sellers, and exempt small businesses with less than $10 million of annual online sales.8
The Stop Taxing Our Potential Act would overrule Wayfair
and return to a physical presence requirement for imposing sales tax.9
The Protecting Businesses from Burdensome Compliance Cost Act also would prohibit states from collecting sales tax unless the seller has a physical presence.10
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