MADISON — 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 eCommerce 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 eCommerce, 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.
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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 sale 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.
There is some good news in the Wayfair decision. It’s not retroactive and it may encourage states to collaborate to balance competing interests.
Along with 23 other states, South Dakota has adopted the Streamlined Sales and Use Tax Agreement, which was created in part by leadership from the Wisconsin Department of Revenue. More states could follow suit.
In the meantime, Wisconsin is set to collect online sales taxes from out-of-state sellers beginning Oct. 1. About $120 million in revenues are expected in the first year. State Revenue Secretary Richard Chandler has said Wisconsin will adopt a “smaller seller” exception consistent with the Wayfair ruling, and the agency will keep businesses and practitioners aware of coming changes.
What’s needed, however, is more thinking about how the Wayfair ruling could set back young eCommerce companies based in Wisconsin. If the state wants to encourage, attract and retain entrepreneurs whose businesses involve selling online beyond Wisconsin, it should consider ways to help those businesses handle the paperwork of sending monthly payments and reports to 50 different states and 10,000 local governments.
Purely brick-and-mortar retailers may applaud the Wayfair decision, but even those traditional stores usually extend their sales reach by tapping online customers.
The challenge for Wisconsin policymakers is not to grab the Wayfair money and run, but to consider ideas that can set the state apart as a place where online merchants can thrive.
Tom Still is president of the Wisconsin Technology Council.