In the coming days, the U.S. Supreme Court will announce its decision in South Dakota v. Wayfair, a case that – if the justices aren’t careful – will have a dramatic, ugly impact on small businesses and entrepreneurs by enabling states to impose an Internet sales tax.
South Dakota – joined by a number of other states – is seeking to require the online home-goods company Wayfair and similar retailers to charge South Dakota state sales taxes from consumers in that state. That would make perfect sense if Wayfair had any stores in South Dakota. But it doesn’t. The state is simply seeking to line its pockets with tax revenue on transactions that occur online, not inside a store within their borders.
The case is also noteworthy because South Dakota is asking the Supreme Court to overturn one of its own rulings, Quill Corp. v. North Dakota (1992), in which the high court found that retailers are not required to collect state sales taxes unless they have a physical presence in that state. Supporters of an internet sales tax argue that the Quill case was decided at a time when mail-order catalogues fueled remote shopping and is now outdated in the Internet age.
But while the method may have changed, the concept has not, and an Internet sales tax is bad policy with far-reaching and negative ramifications. Suddenly, small businesses with just a handful of employees would have to comply with over 10,000 state and local taxing jurisdictions.
Such requirements would transform entrepreneurs into tax collectors, causing them to waste valuable time and considerable resources collecting funds for states they have no affiliation with and subject them to potential audits in states and jurisdictions across the country. This is time, energy and money that entrepreneurs should be free to use to grow their businesses.
The danger to these entrepreneurs does not end with the pending Supreme Court decision. Members of Congress – including many Republicans who should oppose such a disastrous tax policy – have pushed legislation to allow Internet sales taxes.
In addition, many states eager and always revenue-greedy will continue to look for ways to collect these taxes from businesses outside their borders. In their minds, why not? Out-of-state entrepreneurs can’t vote.
If the Supreme Court rules against small businesses in favor of these governments, many small business owners will have to decide if staying in business is worth the hassle of ensuring their compliance with a vast number of individual tax jurisdictions.
One Texas-based small business owner wrote in the Wall Street Journal that it takes her an entire business day each year to pay in-state taxes. If she had to do this for the other 44 states with sales taxes as well, she’d lose 45 business days a year.
And that estimate doesn’t even account for navigating varied and complex differences between states, a burdensome task in and of itself. This particular small business owner, Ann Whitley Wood, has just a handful of part-time employees, meaning she does not have the resources for this monumental task. Simply put, overturning the Quill decision would create onerous burdens that would force many small businesses to close their doors and shut down their websites.
South Dakota may feel as if it is missing out on vast revenue from online sales, but data suggests otherwise. According to the New York Times, only “8.9 percent of retail sales in the United States last year were made online.” That includes transactions through retail giant Amazon, a company that already collects all applicable state sales taxes, and accounted for about 44 percent of online sales in 2017.
So while online sales are changing the economy and are imperative for the survival of certain businesses, South Dakota is overestimating the revenue it could generate from charging sales tax – and underestimating the damage they would do to retailers.
Finally, Americans know Internet sales taxes are bad for business and for the economy. A recent poll from the National Taxpayers Union found that strong majorities of Democrats, Republicans and independents alike oppose new Internet sales taxes. Americans know that these taxes increase state governments’ power to tax across borders, which would negatively impact interstate commerce.
When the Supreme Court issued its ruling in the Quill case, it recognized that forcing small businesses to comply with a nationwide network of state sales taxes rather than just their own states would place an undue burden on entrepreneurs.
This burden would damage interstate commerce and the national economy as a result. For the same reason, the Supreme Court and our elected officials should reject this tax grab and instead uphold the principle of protecting small business owners from burdensome taxes in distant states.