Abstract
Many states’ sales and use tax provisions, updated in response to the Supreme Court’s decision in South Dakota v. Wayfair, Inc., will likely impose a disproportionate tax compliance burden on small- and medium-sized businesses (SMBs) that engage in e-commerce. Relative to large companies like Amazon and eBay, SMBs cannot absorb the high compliance costs associated with tracking, collecting, and remitting taxes. Wayfair expanded states’ authority to collect sales taxes on companies without a physical presence in the state. But states should wield this power judiciously. While mimicking South Dakota’s statute (upheld as constitutional in Wayfair) may help states avoid litigation, they would better promote the goals of fairness and efficiency by exempting a larger category of small vendors from sales tax obligations. In light of the COVID‑19 pandemic, which has acutely hurt SMBs, reducing sales tax-related compliance burden would also help states provide relief to struggling SMBs. States should (1) clarify which entities are subject to the remote seller and marketplace facilitator statutes and (2) raise the de minimis safe harbor thresholds that shield smaller businesses from having to remit taxes.
Highlights
A small recycled yarn company with just twenty-one employees in New York expected to spend $25,000 in 2019 to collect and remit $90,000 in sales taxes.[1]
In noting that signing the Sales and Use Tax Agreement (SSUTA) would “standardize[] taxes to reduce administrative and compliance costs,” the Wayfair Court implied that the “undue burden” analysis of a tax statute may encompass other relevant aspects of the tax regulatory regime that relate to compliance burden, not just the sales and transactions thresholds.[122]
As discussed in Part II.c, the de minimis threshold of a remote seller statute serves the dual purpose of providing a safe harbor for small vendors and ensuring that sales and use tax remittance liability falls only on those that availed themselves of doing substantial business in the state
Summary
A small recycled yarn company with just twenty-one employees in New York expected to spend $25,000 in 2019 to collect and remit $90,000 in sales taxes.[1]. Wayfair Eliminated the Physical Presence Standard and Reinterpreted the Commerce Clause to Allow Collection of State Sales Tax on Remote Sellers, 54 GONZ. (2014) (making permanent the Internet Tax Freedom Act, first passed in 1998); Chen, supra note 19, at 435–37 (discussing how the ITFA does not prohibit states from taxing digital content, but rather prohibits states from applying higher tax rates to online versus offline modes of sales transactions). In addition to mitigating the compliance burden on SMBs, states implementing sales tax regimes post-Wayfair may seek to: (1) maintain the state and local tax revenue base, (2) increase efficiency and administrability of sales taxes, (3) prevent the distortion of consumer choices between analogous digital and nondigital goods, and (4) promote greater competition in the online retail market that has been dominated by a few players. The hope is that lessons drawn from the implementation of Wayfair may provide useful insights for tax authorities, domestic and abroad, especially against the backdrop of COVID-19, which is expected to further shift consumer demand from brick-and-mortar retail to e-commerce.[42]
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