On Tuesday, nearly four years to the day from the Supreme Court’s 5-4 decision in South Dakota v. Wayfair, which effectively allowed states to require out-of-state businesses to collect and remit sales taxes from online transactions for the first time, the Senate Finance Committee held a hearing to examine how the decision is impacting small businesses across the nation.
NTU Foundation submitted a written statement to the Committee ahead of the hearing, outlining some of the consequences small and online businesses have faced in the four years since the Wayfair ruling. In that statement, NTUF also shared reform we believe Congress should advance that would reduce the financial, legal, and administrative burdens entrepreneurs continue to face as a result of new economic nexus rules in the 45 states that impose sales taxes.
Fortunately, there was plenty of overlap in the hearing between NTUF’s proposed reforms and the recommendations outlined by small business and expert witnesses who testified at the Finance Committee hearing. Several Senators from each party expressed a willingness to partner on a bipartisan Congressional solution that would ease small business burdens complying with post-Wayfair laws and rules going forward. NTUF sincerely hopes that this hearing represents the beginning – rather than the end – of that conversation in Congress, and we stand ready to assist lawmakers as they develop policy solutions in partnership with states, localities, voluntary associations, and – most importantly – small business owners themselves.
Senate Finance Committee Chair Ron Wyden (D-OR) kicked off the hearing by acknowledging the disproportionate impact the Wayfair ruling has had on the five states that don’t impose sales taxes, including his home state of Oregon. (The others are New Hampshire, Montana, Alaska, and Delaware.) Chair Wyden stressed that Congress needs to step in and provide relief, citing his Online Sales Simplicity and Small Business Relief Act – which would limit states trying to require businesses to collect and remit sales taxes for online transactions on a retroactive basis – as one path forward. (NTUF wrote about a very similar bill in the House back in 2018.)
Committee Ranking Member Mike Crapo (R-ID) noted that a “comprehensive solution” to the problems small businesses are facing remains “elusive,” while arguing that any Congressional reforms need to strike a balance between the rights of states to impose sales taxes and the need to minimize economic and administrative burdens on small businesses.
The Committee’s sole government witness, James McTigue of the non-partisan Government Accountability Office (GAO), testified that 33 states collected $23.1 billion in taxes on remote sales in 2021, up from $16.3 billion collected by 31 states in 2020 – and up from $6.7 billion in remote sales taxes collected by 28 states in 2019. McTigue noted that the pandemic contributed to the uptick in remote sales tax collections from 2019 to 2020-21, with “e-commerce sales generally experienc[ing] a faster growth rate than overall retail sales between 2017 and the onset of the COVID-19 pandemic in early 2020.”
McTigue also highlighted that small businesses continue to face additional software, audit, and research and liability costs due to the Wayfair decision, flagging that 37 states also have local sales tax jurisdictions and that there are between 10,000 and 12,000 local sales tax jurisdictions in the U.S.
The most compelling testimony came from two small business owners: John Hennessey, president and CEO of New Hampshire-based Littleton Coin Company; and Michelle Huie, founder and CEO of Montana-based VIM & VIGR Compression Legwear.
Hennessey testified that complying with state economic nexus rules in the wake of Wayfair has cost his business nearly half a million dollars – $225,000 in initial costs (for compliance software, legal expenses, information technology updates, and more) and ongoing third-party costs of around $50,000 per year. Huie testified that her business faced three primary challenges with the new state sales tax rules: 1) research, 2) registration, and 3) remittance. She said that she was surprised when she learned, in the months after the Wayfair ruling, that she had reached economic nexus thresholds in 22 states, because most of her business at the time was wholesale (business-to-business).
Both business owners spoke of long hours attempting to comply with different state and local laws, rules, and regulations, along with the fear they’ve felt about potentially being out of compliance with constantly changing rules and the possibility of retroactive assessment on their business by different states.
Hennessey warned that states are increasingly using the post-Wayfair landscape to assess new, non-sales taxes on remote sellers, such as franchise fees, commercial activity taxes, and more. He estimated that these non-sales taxes and fees cost his business $40,000 per year, and that since his business is employee-owned the reduced profits to Littleton Coin adversely affect employees’ retirement accounts. He also noted that California is requiring Littleton Coin to pay business income taxes despite having no physical presence in the state. (NTUF’s Andrew Wilford wrote about California’s troubling new moves in May.) Hennessey said that if California decides to take Littleton Coin to court, it could cost the small business more than $100,000 in legal fees.
Also testifying was Craig Johnson, the Executive Director of the Streamlined Sales Tax Governing Board. The Streamlined Sales and Use Tax Agreement (SSUTA) counts 24 states among its members (of the 45 who impose sales taxes), and their mission is to “simplify and make more uniform the sales and use tax collection and administration for retailers and states.” SSUTA doesn’t require states to impose the same sales tax rate, nor does it prohibit states from allowing localities to impose additional sales taxes on top of the state rates, but it does simplify sales tax compliance and administration for remote sellers doing business in those 24 states.
That is why NTUF issued, as its top recommendation to Congress in written testimony, that all states imposing sales taxes be required either to join SSUTA or to adopt tax simplification reforms that mirror some of SSUTA’s features. These features include:
- State-level tax administration, which would allow remote sellers to have to interact with only one entity (the state) in understanding their sales tax obligations, and collecting and remitting sales taxes, rather than the states and hundreds of localities;
- Uniform rules on where remote sales are to be sourced for tax purposes, specifically: the location of the address to where the product is to be delivered;
- A single sales tax rate option for businesses per state like Texas has, where a remote seller can choose between paying taxes at all the different state and local rates within a single state or instead opt to pay a single, weighted-average rate to the state; and
- Access to free tax compliance software, with costs defrayed by the state (or at the federal level, if need be).
SSUTA’s Johnson noted that his organization has reached out to all 21 states that are not party to the voluntary agreement – holdouts include several of the largest states in the nation – and the fifth witness at the hearing, Diane Yetter of the Sales Tax Institute, told Sen. Ben Cardin (D-MD) that Congress should contemplate incentives for non-SSUTA states to join the agreement.
Hennessey and Huie were frequently asked by Senators to share their recommendations for policy solutions to the issues small businesses face in complying with economic nexus rules. Both agreed on several reforms that would help: the option to have a single sales tax rate per state (which NTUF recommended as well; see above), uniform rules on product classification, and protection from retroactive taxation (which NTUF has also recommended).
NTUF also recommended that Congress:
- Impose a national de minimis threshold for requiring remote businesses to collect and remit sales taxes that states could not fall beneath;
- Require states to only count taxable sales towards de minimis thresholds (thereby easing burdens on entrepreneurs that conduct a lot of wholesale business like Huie and Arizona-based Halstead Bead, which NTUF’s Taxpayer Defense Center represents in a lawsuit challenging Louisiana’s byzantine sales tax system);
- Protect remote sellers and sales tax software providers from liability in cases of mistakes by the other or at the state level;
- Reform the Tax Injunction Act so that out-of-state businesses challenging unfair tax rules in the states have a federal avenue for relief and due process; and
- Providing some level of amnesty for the uncalculated but significant number of small businesses that may not currently be in compliance with states’ economic nexus rules and possibly have not been in the four years since Wayfair.
The hearing was a promising first step in Congress’s re-engagement on the issues facing online and remote sellers in the post-Wayfair era. We look forward to working with federal lawmakers – and in the states – for permanent solutions that provide some relief and support for millions of small business owners and their employees.
Andrew Lautz is the Director of Federal Policy for National Taxpayers Union.