Bill Could Solve 'Compliance Labyrinth' Facing Some Businesses After SCOTUS Online Sales Tax Ruling

Chris Heitman, the owner of a successful auto racing supplies business in Wisconsin, is getting hounded by out-of-state revenue officials trying to collect sales taxes for online transactions. Reason detailed his plight earlier this month.

After years of congressional inaction on the question of whether internet retailers should have to pay state-level sales taxes, the U.S. Supreme Court last year upheld a South Dakota law allowing the state to collect taxes from businesses that make at least 200 transactions or do $100,000 of gross sales into the state. That decision, in Wayfair v. South Dakota, set off a mad scramble in other states to set similar standards for taxing out-of-state businesses. States are eyeing a windfall of revenue by targeting online sellers like Heitman—New Jersey, for example, plans to collect $3 billion in sales taxes this year from businesses outside the state—in what can be described literally as taxation without representation.

For Heitman and other owners of small and mid-sized businesses, that means having to get up to speed on tax codes in 45 different states. (The five other states have no sales tax.) It's not as simple as looking up what rate to pay; state sales tax codes are notoriously complex.

This week, Heitman emailed to tell me about a "tremendously complicated and expensive compliance labyrinth" he's encountered in Kentucky.

Heitman says his business made $1,500 in profit on roughly $38,000 in gross sales over 299 transactions in Kentucky during 2018. Because the number of transactions is high enough to trigger the new post-Wayfair standard, he owes sales taxes to the state. It's going to cost at least $750 to having his accounting firm prepare the 17 pages of tax forms the Kentucky Department of Revenue sent him, he says, and that's not counting the expense of actually paying the tax itself.

"Tax compliance costs will ensure an actual net loss on Kentucky sales," he writes. "We would be better off putting a notice on our website saying that we can no longer ship any orders to Kentucky."

It's Congress that must ultimately address the chaos created by the Wayfair ruling, as this is plainly a question of regulating interstate commerce. You'd rarely lose by betting against congressional action, but a bipartisan bill introduced Wednesday offers a glimmer of hope for entrepreneurs like Heitman.

The Online Sales Simplicity and Small Business Relief Act, introduced by Rep. Jim Sensenbrenner (R–Wisc.) and cosponsored by Reps. Jeff Duncan (R–S.C.), Anna Eshoo (D–Calif.), and Zoe Lofgren (D–Calif.), would ensure that states cannot require remote online sellers to collect sales tax retroactively on transactions made before January 1, 2019. That gives small businesses at least the rest of this year to adjust to the Wayfair landscape, freeing Heitman from having to pay taxes to Kentucky, and any other states, for sales made during 2018.

More importantly, it would exempt sellers who gross less than $10 million in annual sales from owing taxes to other states. That's a much higher threshold than the 200 transactions/$100,000 standard created in Wayfair, and it would mean that Heitman's $38,000 in Kentucky sales would remain tax-free.

That exemption would be repealed, the bill says, if states agree to a simplified sales tax compact that is approved by Congress. In the long term, that's probably the best way for states to collect remote sales taxes. Rather than having to comply with all sales tax rules in 45 different states, a simplified compact might see all states agree that cross-border sales will be taxed at a single, flat rate.

Until a compact like that exists—and it likely won't exist unless Congress gives states a strong incentive to agree to one—Sensenbrenner's bill would protect small and mid-sized online businesses from being hounded by out-of-state taxmen.