The Economic Case For Remote Sales Tax Uniformity

George Isaacson has been watching the results of South Dakota v. Wayfair play out for nearly two years, as states unfurl all kinds of economic nexus and marketplace facilitator policies. Isaacson, a lawyer, Bowdoin College professor, senior partner at Brann & Isaacson and Data & Marketing Association tax counsel, argued Wayfair’s side in the precedent-setting Supreme Court case that has small businesses struggling. The cost of the new taxes does not seem to be weighing businesses down, but the pain of compliance certainly is, he said.

“It’s a wet rag on the economy to have a tax system in which you literally have thousands of jurisdictions that have different tax elements,” Isaacson recently told PYMNTS. “The U.S. is the only country that has such a complex consumption tax system.”

Isaacson gave PYMNTS an expert’s perspective on how the flurry of state laws is impacting companies — from small to medium-sized businesses (SMBs) to overseas retailers — and why a federal remote sales tax law may be a major economic boon.

Remote Sales Tax Laws: Winners and Losers

The United States’ current array of remote sales tax laws is causing chaos for some companies, particularly SMBs and startups, Isaacson said. The costs of paying the taxes are generally minor inconveniences compared to the expenses of deciphering each county, municipal or state law and ensuring proper tax filing, he said.

Merchants often sell their goods and services through multiple platforms in addition to their own websites. They must, therefore, figure out which jurisdictions make them responsible for all their sales’ eCommerce taxes and which require some or all of the platforms they sell on to collect those taxes. Tax rates and other factors vary across states and localities as well, worsening policy navigation headaches.

Businesses must also recognize that the many states and municipalities with remote sales tax laws may each audit merchants to ensure compliance. Audits are typically “very arduous and expensive undertakings” for merchants, according to Isaacson, and some do not think selling in other states is worth the added costs of audits, collecting and reporting taxes and — should they make compliance mistakes — punitive fines.

“A large number of companies have decided that [interstate selling] it is not realistic for them, both because of the cost of compliance – there are 12,000 different sales and use taxes in the U.S. — or because of the risks that may come with not complying to the [proper] level of detail and finding themselves exposed to substantial tax assessments,” he said.

And the complexities do not end there. Isaacson observed that an increasing number of states interpret the Wayfair ruling as a permit to tax remote sellers on the corporate net income generated from in-state economic activity. As a result, businesses will not only have to sort through new compliance questions when filing sales taxes.

Not everyone is feeling the pain equally, though. The businesses most likely to benefit from such laws include brick-and-mortar stores that sell locally, but they are not the only benefactors. Isaacson noted that large companies may see their dominance cemented as tax compliance expenses deter new competitors from entering the market. Overseas companies could additionally find it easier to cheat tax laws because it is more difficult for city and state governments to pursue noncompliant companies in foreign countries.

“States have not been aggressive in [their] efforts to enforce compliance on international companies because they don’t really have the tools to [do so],” Isaacson said.

The Road to Simplification

States have made efforts in prior years to streamline interstate sellers’ tax compliance. Twenty-four states participate in the Streamlined Sales Tax Project (SSUTA), under which they agree to align parts of their tax codes — including common product definitions — and enable sellers to register once with the SSUTA rather than separately with each different state. States’ interest in the program seems weakened, not strengthened, by the Wayfair ruling, Isaacson asserted.

“Since Wayfair was decided, no new states have joined [SSUTA],” he said. “I think states now have the view that they’ve been given license to export their tax systems across state boundaries and there’s no incentive for them to simplify, whereas prior to Wayfair, they felt that [participating in SSUTA offered] advantages.”

High-population states such as New York and Florida are not SSUTA members, limiting the potential impact of the program, Isaacson added. SSUTA may be unlikely to resolve the current disarray among states’ and localities’ remote sales tax policies, and he believes the best solution is for a federal law to require more simplified and unified remote seller tax systems.

Such legislation has a good chance of passing, but it could be slow coming, Isaacson said. Members of Congress are likely to be receptive to better supporting SMB growth via tax reform, but he noted that political matters such as the 2020 elections and impeachment hearings currently occupy the focus of legislators.

The 2018 South Dakota v. Wayfair ruling has opened the doors to many new tax laws and questions, and businesses and governments are still grappling with the full economic impacts of these changes. Demand is rising for a widescale effort to simplify remote sales tax compliance — before too many SMBs suffer.