Small businesses have the most to lose from Internet sales taxes
March 24, 2020
On April 17, the nine Justices of the U.S. Supreme Court will hear arguments for and against allowing states to levy sales taxes on goods sold online.
The proponents of the state Internet tax, led by the state of South Dakota, will argue that allowing states to collect taxes from out-of-state retailers is only a matter of basic fairness for in-state retailers who compete against giant, out-of-state virtual stores.
The problem is, the underlying facts of today’s retail world are in many instances opposite of what tax proponents are arguing.
My wife, Juliette, and I manage a small business in Georgia. If our company was allowed to stand before the court, I would argue the opposite side – that a basic sense of fairness requires the Justices to uphold the existing standard, which forbids states from imposing sales taxes on remote sellers who sell across state lines.
We own and manage a six-person firm, Ethos Dynamics, which acquires surplus IT equipment, refurbishes it to a high standard, and resells it to other businesses. Like the rest of the world, we have an informational website. We use LinkedIn and other platforms to pursue leads, but we primarily rely on traditional salespeople who know the market and have strong connections to customers.
The majority of small retailers are utterly unlike large, online outfits such as Amazon, Walmart and Apple. Large retailers maintain national networks of "brick-and-mortar" stores, giving them a physical presence wherever they are. Under the current Quill precedent, these big retailers are already required to collect and remit state sales taxes. The idea that there are large warehouses of goods going untaxed by states is largely a myth. About 60 percent of retailers today are “multichannel,” meaning they sell out of physical stores as well as from virtual ones.
So the competition in retail today is not between in-state "brick-and-mortar" stores and remote Internet sellers. Competition today is between retail giants that sell in both places, and small businesses that simply sell across state lines. Such small businesses — in South Dakota and elsewhere — can only compete if we are not overwhelmed with a complex burden of tax compliance in a myriad of jurisdictions.
For a small operation like ours, a reversal by the Court would mean we would somehow be stuck collecting taxes at different rates and under vastly different rules for 45 states and thousands of localities. We would have to keep track of the exact channel by which our sales are made -- by phone, email, or some other means -- and that would determine the sale's tax treatment. We would also have to untangle the sales we make to resellers in other states versus direct sales to end customers.
Beyond the logistical nightmare of managing the requirements of 45 state tax regimes, the most unfair aspect of an Internet sales tax would be the constant threat of having to face an audit from any distant state, where we have no nexus nor representation and no easy recourse to challenge their demands. When we located our company in Georgia, we knowingly signed up for the possibility of audits from our home state. I calculate that one audit would absorb the energies and attention of our team for a full work week. That would not be welcome, but we incorporated in Georgia and we will handle it if need be.
But what what if California said, "We don’t believe your remittances" and announced an audit? Or Illinois? Or any other state with a large deficit in their public employee pension plans? If I received a bill for an additional $1,000 from another state, I would face the prospect of being forced to pay it – whether I owed it or not – or having my business/revenues disrupted one week per state. Given the dire fiscal situation of many states, coming after an out-of-state retailer would be easy money -- low-hanging fruit, in a process almost defined by the idea of “taxation without representation.”
Our business also shows how expansive such a tax would be, covering not the large (and increasingly imaginary) online giant warehouse retailers, but also little outfits like Ethos that largely rely on shoe leather and telephone calls to make our sales. A reversal of the existing precedent might seem at first like a swipe at the big guys, but it would actually be a death blow to small business.
When the Justices hear these arguments, we hope they take a deeper and more fact-based look into what fairness really requires.
Lyle Gore is the managing director and co-owner of Ethos Dynamics in Suwanee, Georgia.