Congress Must Stop the Internet Sales Tax Mugging of Small Businesses and Jobs

Americans from coast to coast enjoy purchasing goods on the internet. It’s comfortable, convenient, and the product is delivered right to your doorstep. Online shopping makes it possible for people to buy products from states clear on the other side of the country and, in many cases, to find unique or difficult-to-find items.

This boom in online shopping has brought tremendous benefits to consumers but also created tremendous opportunities for small businesses. This trend has created countless small sellers across the nation leading to the creation of jobs and wealth.

This exciting trend faces a potential hurdle after a Supreme Court ruling this summer. The case (South Dakota v. Wayfair) overturned a decades-old precedent in Quill Corp v. North Dakota. Specifically, the justices’ decision struck down the “physical presence” standard, which stipulated that out-of-state sellers, referred to as remote sellers, were not required to collect sales tax for states where they did not have a physical presence.

Under the previous standard, a small seller in Ohio is not required to collect and figure out the sales tax for an item bought from a consumer in California or any other state. With over 10,000 different tax jurisdictions across the nation, the burden for small businesses would be crushing. This will create enormous costs for companies that have to navigate complex tax laws. Small sellers may need to pay accountants and lawyers to help them comply with these thousands of laws and may open themselves up to potential audits and other state regulations. Large corporations may easily be able to comply with these burdens, but it may be impossible for small businesses.

As a former state and local official, I know that many states will rush in and try to get their hands on additional revenue. Some states have already moved to begin collecting – some even on the smallest seller and some have even threatened retroactive taxation. These officials will be more than happy to impose these burdens on businesses that don’t reside in their state and whose votes they don’t depend on.

The Wayfair decision has left many businesses in limbo wondering what the impact will be, not knowing if there will be generous thresholds for small business before they have to collect or if they will have to collect retroactive taxes.

Thankfully, representatives in Congress have recognized the problems created by the Supreme Court decision. Rep. Sensenbrenner (WI-05), along with a group of bipartisan lawmakers, have introduced a bill to fight the taxation tidal wave. The bill, the Online Sales Simplicity and Small Business Relief Act, will clarify interstate tax on remote sales.

Provisions in the bill include a ban on retroactive taxes, which would bar states from taxing any sales from remote sellers prior to June 21, 2018, the date the Court handed down Wayfair. The bill also establishes a phase-in period of compliance, preventing states from collecting taxes until January 1, 2019. Additionally, the Online Sales Simplicity and Small Business Relief Act provides small businesses with some breathing room. The bill allows a generous $10 million exemption for small businesses, meaning any seller that generates less than $10 million in sales a year would not be affected by online sales taxes. The provision remains in place until the States can create a compact to be approved by Congress where such a waiver is unnecessary.

As the National Taxpayers Union argued in endorsing the Sensenbrenner bill, “Absent Congressional action, billions of dollars in interstate commerce and millions of small businesspeople face the threat of back-tax bills, complicated collection obligations, and nationwide tax and audit responsibilities simply for having the temerity to use the internet to reach buyers.”

The Supreme Court made a mistake in overturning its physical presence precedent, but Congress has the opportunity to alleviate some of the uncertainty that has been unleashed by the decision. The Online Sales Simplicity and Small Business Relief Act is an important step towards protecting small businesses and taxpayers.

Ken Blackwell is a member of the Policy Board of the American Civil Rights Union. He was a Domestic Policy Advisor to the Trump/Pence Presidential Transition Operation.

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