By Ian McCue, content manager at NetSuite
⏰ 4-minute read
In the face of new state laws regarding online sales tax, many growing businesses find themselves in a tough spot financially as they work to comply.
It’s surprisingly easy for a lot of small businesses to hit the transaction thresholds that make them liable to pay online sales tax in many states.
Additionally, most companies need tax automation software to deal with the sudden influx of laws, adding a new, significant operational cost that larger companies can handle better than smaller ones.
As states implemented e-commerce sales tax laws over the past nine months, they may have overlooked the full impact of these new rules on growing businesses.
Leaders at many small and midsize companies feel these laws have an especially harsh impact on them compared to bigger e-commerce players like Wayfair (one of the companies that challenged previous online sales tax laws in a recent, game-changing Supreme Court case), Walmart and Amazon.
“Absolutely, I think [the recent change to sales tax laws] has a much bigger impact on businesses such as ours,” said Clint Swain, systems administrator at Becker Safety and Supply, a family-owned business in Greeley, Colo. “We’re in a good spot financially, but those bigger companies that do a lot more business, they can absorb the shock a little bit easier financially. There’s more cushion there.”
"Those bigger companies that do a lot more business, they can absorb the shock a little bit easier financially. There’s more cushion there."
Obviously, the larger a business is, the more likely it is to meet the revenue and transaction thresholds that require paying online sales tax to a given U.S. state. However, the time-consuming, costly task of becoming compliant and filing returns is something companies of all sizes must do.
“The amount of effort it takes to file a tax return, I don’t know if it’s going to be that much different when you’re filing a tax return with extra zeros or without extra zeros,” said Ben Argov, president of California-based International Wine Accessories. “You still have to go through the exercise of filing that tax return.”
Transaction limits pose a problem
Forty states and Washington, D.C. have already implemented laws that require retailers to collect and remit tax once they surpass certain thresholds (with more on the way). About two-thirds of those states have the same South Dakota threshold that several e-commerce retailers challenged in the Supreme Court case: $100,000 in revenue or 200 transactions made in that state.
That transaction limit poses a problem for many small retailers that sell relatively cheap products and have a low average order value. For example, if an e-commerce company’s average order value is $15, it would exceed the transaction threshold and become responsible for collecting e-commerce sales tax in one of these states after generating only about $3,000 in sales.
“It does create nightmarish proportions of compliance obligations for a small business that might just be a husband and wife making a million bucks a year in sales but maybe only netting $100,000,” explained Mike Dillon, an experienced tax attorney based in Maryland. “And they’re doing it out of their house, and suddenly they’ve got to file in 30 states, and they’re losing money running this business now that was [formerly] making a fairly decent profit.”
“It does create nightmarish proportions of compliance obligations for a small business."
A new, unavoidable expense
In a post-Wayfair world, most companies need tax automation software to comply with this web of complex, ever-evolving e-commerce sales tax laws. Leading products of this kind integrate with a business’ system of record, often called an ERP, that holds information on financials, orders, inventory and customers. Tax automation solutions also integrate with popular e-commerce software so the correct amount of tax is immediately calculated for buyers based on their order size and location.
Buying a tax automation software is usually cheaper than hiring an employee for this task and less error-prone. But this is a significant expense that most growing businesses did not have to budget for in the past, and it’s something they must outsource to a third party since they lack the resources to manage it internally.
Large enterprises will pay more for their solution given the volume of transactions they process and more complicated IT infrastructure, but they can afford to budget millions of dollars for compliance and dedicate an entire team to it.
Meanwhile, “not every small business can absorb these costs,” said Sean Dhaliwal, VP of Marketing at Rubber-Cal in Southern California. “Even the most minute of costs and changes, it can really put a hurt on small businesses. I know there are a lot of small businesses out there who are smaller than us, people who sell online maybe out of their garage. Some of this stuff can make or break them, so I’m really sympathetic toward them.”
"Some of this stuff can make or break them, so I’m really sympathetic toward them.”
Back taxes will become another major expense if any states pursue them under these new laws. Growing businesses would be especially vulnerable here, since most only recently became compliant or are still in the process of becoming compliant due to lack of time and/or money.
The bottom line
Complying with e-commerce sales tax laws is the new reality for growing businesses. Unless Congress steps in--which experts say seems unlikely at this point--or states relax their laws, companies must eat the cost of compliance.
If you’re just sorting through the implications of the Supreme Court ruling and wondering where to go from here, check out these four steps you can take to become compliant.