Supreme Court Debates Sales Tax Impact on Small Businesses
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BY MARIE OH HUBER, OPINION CONTRIBUTOR - THE HILL
If you run a company that makes just $60,000 a year, paying an accountant $50,000 a year to comply with 300 different tax jurisdictions’ regulations isn’t in your budget.
The U.S. Supreme Court has the opportunity to prevent this burden from hitting millions of small businesses. In South Dakota v. Wayfair, it is deciding whether a state may impose sales tax collection obligations on sellers without a physical presence in that state. In the process, it is deciding whether the 4.1 million small businesses that sell online can continue to do so successfully. If the Supreme Court rules for South Dakota in this critical case, it will do real damage to the growth opportunities of small retail businesses and the more than 15 million people they employ.
That’s why eBay Inc., where I am general counsel, filed an amicus curiae brief with the Supreme Court, requesting that the Court uphold existing law, which prevents states from imposing sales tax collection obligations on sellers without a physical presence in their states.
Take Chris Bright and ABC Motors and Marine, Inc., a company that specializes in dismantling old marine vessels and recycling their parts, which helps reduce landfill waste. After expanding his business to sell these parts online, Bright was able to generate $60,000 in income.
ABC Motors and Marine, Inc. is the type of company America needs more of, yet it exemplifies the kind that will be hurt most if the Supreme Court overturns its own precedent when it decides South Dakota v. Wayfair. The state of South Dakota has made the extraordinary request that the Court overrule its 1992 decision in Quill Corp. v. North Dakota. In that case, the Court decided that a state may impose sales tax collection obligations only on sellers with an in-state physical presence in order to avoid imposing undue burdens on interstate commerce.
This decision was forward-thinking on the part of the Court. Within a decade of the ruling, e-commerce had taken root as a popular and convenient way for American consumers to buy, while millions of small- and medium-sized entrepreneurs in the U.S. had the opportunity to establish and grow their businesses, support their families and employ workers. They reached consumers near and far, by selling on tech-enabled platforms like eBay. The Court’s ruling benefited American businesses and consumers.
In its case before the Court, South Dakota maintains that changes in the economy have rendered the Quill rule obsolete. If anything, however, the growth of e-commerce has made Quill even more relevant today. If the Quill decision were overturned, millions of businesses like ABC Motors and Marine, Inc. would face crushing accounting, administrative and legal bills.
One of the most significant changes since Quill is that e-commerce has made it much easier for microbusinesses to achieve broad geographic reach. Seventy-five percent of small retail businesses in the U.S. now use at least one major digital platform for sales, and eBay data indicates that they likely average sales to 44 states a year. These small businesses pay taxes in the states where they’re physically located, and where they use the local resources. If South Dakota prevails, these small e-commerce businesses will be subject to multi-state tax burdens that are significantly greater than those imposed on their equivalently sized brick-and-mortar counterparts. They also will be required to collect taxes in states where they neither benefit from local services nor participate in the local political process.
The compliance burdens for these small businesses would be immense. The Government Accountability Office recently reported that between 10,000 and 12,000 jurisdictions now collect sales tax, “each with potentially different tax rates, different rules governing tax-exempt goods and services, (and) different product categories.” The typical small- and medium-sized retailer selling $10,000-$500,000 annually has customers in more than 300 different taxing jurisdictions. In Chris Bright's case, he estimates the cost of compliance to be $50,000.
These businesses often lack money for back-end operations, so they can’t afford expensive accountants and lawyers. That’s to say nothing of potential audits in states across the country, litigation if they under-collect and consumer fraud suits if they over-collect. Handling these issues with free software, as some suggest, is a pipedream. The complexity of these burdens has only grown since the Quill decision.
If the Supreme Court rules for South Dakota, it would cause substantial damage to a critical, vibrant segment of the national economy — independent small businesses. Many independent online sellers would have to limit or close their operations if the physical presence rule were overturned. Lost innovation, income and job creation would far outweigh whatever limited increase in tax revenue states like South Dakota might be able to collect from those small businesses that do survive.
Creating and maintaining a successful small business is hard enough as it is. Slapping them with tens of thousands of dollars in compliance costs is the last thing they need. The Supreme Court must side with small business owners like Chris Bright. It must uphold Quill Corp. v. North Dakota.
Marie Oh Huber is Senior Vice President, Legal, Government Relations & Public Policy, General Counsel at eBay Inc.