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Jul 24, 201812:42 PMInside Wisconsin

with Tom Still

Court decision on collecting online taxes could hurt entrepreneurs

(page 1 of 2)

For many state and local governments, the U.S. Supreme Court’s decision in South Dakota v. Wayfair Inc. may seem like a revenue windfall. States such as Wisconsin may collect millions of additional sales tax dollars because the high court upheld South Dakota’s law requiring online retailers to collect them.

It’s not a windfall, however, if the net effect of the law is to harm commerce by making it a lot harder for small businesses to conduct business through the internet.

That’s the emerging fear in the wake of the June 21 Wayfair decision, which allows states to require out-of-state online retailers to collect sales taxes from South Dakota — even in states where they don't have a physical presence, such as a store or warehouse.

While the Amazons of the world likely won’t see much effect on their bottom lines, the cost and paperwork headaches of complying with new sales tax rules in 50 states and thousands of local jurisdictions could drive a lot of small e-commerce companies out of business.

The justices overruled a 1992 Supreme Court decision, Quill Corporation v. North Dakota, which set the standard for how states tax online purchases. Until the Wayfair ruling, states could tax only businesses with a physical presence in their state. The latest ruling is a departure from 25 years of legal precedent and threatens e-commerce, in general, but poses special challenges to on online entrepreneurs.

Some Main Street businesses had been clamoring for years for the Quill ruling to be overturned, perhaps thinking internet competition would disappear. The smart Main Street merchants elected to set up online sales networks of their own, turning a “mom-and-pop” store with sales limited to a single city or county into a business that reached across state and even national borders.

That phenomenon appears to be as true in rural Wisconsin as in its cities, with strong results for small towns with signature online businesses.

These businesses don’t usually sell “a zillion things home,” as Wayfair advertises, but specialty items ranging from crafts to art, from T-shirts to organic products, and from gifts to indigenous foods.

The South Dakota law has a “small seller” exception for out-of-state retailers that don’t exceed $100,000 in sales or 200 separate transactions in the state. Even if other states follow those standards, however, a small business with $5 million in online sales spread across the nation will find itself paying taxes in all 50 states. That same business could find itself collecting sales taxes on 200 sales averaging $20 each in one state, thus requiring that business to set up expensive procedures to collect taxes on about $4,000 in gross revenue.

(Continued)

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About This Blog

Tom Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal.

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