Generally I find the legal happenings of the courts in the US a very dry topic. But in June of this year, the Supreme Court overturned a ruling which may have a very big impact on West of Olympia, so my ears perked up. Maybe you heard about this new sales tax ruling and maybe you didn’t, but I want to explain why this decision will impact every single United States wet shaving player in the game; perhaps even mortally so. I also want to explain the different outcomes it may have on us and a good path forward from my perspective.
Let me first explain the current state so I can contrast it.
As it currently stands, I charge you sales tax when you buy a product from me only if you reside in Washington state. Depending on where you live in Washington, I may also charge you additional tax levied by your city, county, or other municipality. Collecting these taxes is required of me to maintain my good standing with the state of Washington and allows me to continue doing business here. Every quarter, I take the taxes I have collected from you and give them to the State.
But what if you buy a soap of mine and don’t live in Washington? (Like about 85% of you)
Online retailers don’t charge sales tax on orders from states they do not operate in. Only when a company has a physical presence (a “nexus”) in a state do they collect and remit taxes there. And thank goodness for that, because figuring out how to remit taxes to 50 different individual states – all with different tax requirements – would be insanely frustrating and impractical.
But not so fast.
The Supreme Court ruling in June has reversed this decision, which means states are now allowed to create their own laws requiring all online retailers, regardless of physical presence, to collect and remit sales taxes.
So what does that mean for me and any other small, online business? The uncertainty around it is a bit worrying.
The first point here is that collecting and remitting sales taxes is complicated and time-consuming. I rely on my e-commerce platform, Shopify, to keep track of all of the appropriate tax rates in the hundreds of municipalities in Washington to correctly collect sales taxes on each sale. The taxes and laws that govern each of these pieces of the state are complicated, obscure, and ever-changing. Without e-commerce products like Shopify, small online businesses wouldn’t be able to navigate this.
Secondly, the task of remitting sales taxes every quarter to the Secretary of State is a time-consuming procedure. There’s some automated options for this, but the cost of those solutions are not yet justifiable for me, so I spend time manually working through it 4 times per year.
The worst case scenario as a result of this ruling is that I would need to do this 50 times for each of the 50 states I sold product in. Further complicating matters is the fact that every state and municipality would be different. Maybe in State A, I only remit taxes if I sell more than 100 orders in a month. Maybe State B has a revenue threshold. Maybe Municipality A charges a different tax rate on my product because it contains a certain ingredient. There’s all kinds of stuff that would turn this into an administrative nightmare.
Here’s what I can say: in the worst-case scenario, where each state individually mandates its own online sales tax laws and does not provide exemptions for small businesses, I would shut down my business. It just isn’t worth the hassle of registering with 50 different Secretary of States to navigate 50 completely different tax systems. As if that’s not de-incentive enough, there are stiff financial penalties when taxes are not submitted correctly. This is only a hobby for me after all. Just not worth it.
Fortunately, I think there are other ways through this.
The Supreme Court has not made any new laws in relation to state-by-state sales tax collection. What they’ve done is essentially said, “State A, you are allowed to require out-of-state online retailers to collect and remit sales tax”. The Supreme Court has left it to the lower courts to figure out the details or whether or not states want to go along with it at all.
In my humble opinion, the best thing that could happen for everyone – especially small, online retailers – is for a law to be made at the Congressional level that simplifies the whole system to give the market a baseline to work from. It seems like the most intelligent way to do this would be to create a revenue threshold for all online retailers, thereby providing an exemption for the small businesses who don’t have the people, resources, or time to collect and remit sales tax in 50 individual states and tens of thousands of municipalities.
For example, the law made at the Congressional level might state that States are only allowed to require online businesses to collect and remit sales taxes there if: a) they have a physical presence in the state, or b) do annual revenues of $100,000 or more in that state (that figure is totally out of thin air and just for the sake of the argument).
This type of law would do a few things. First, it would allow small businesses to operate across state lines online without having to worry about the additional burden of sales tax collection. Should the small business grow to a point where their sales exceed $100,000 in annual revenue from a single state, the logic would be that the business would have sufficient resources at that point to handle the additional administrative burden.
Perhaps more importantly, this law would make sure new entrepreneurs aren’t discouraged. If you are an entrepreneur looking to start the next Amazon, it may be really tough (or impossible) to do so staring down the barrel of 50 different individual tax codes. Looking back, I don’t think I would have started selling soap if I had known I needed to figure out sales tax collection in 50 states before I sold a single item. With a revenue threshold, the state might miss out on a few thousand dollars of tax revenue in the beginning, but if a business is wildly successful, it’ll gain millions of dollars in tax revenue over the life of the company operating in that state. Better to allow those businesses a break when they are small than to discourage them from the outset.
Third, a law like this would make sure that states are able to (rightly) capture the vast majority of the revenue they miss because the big guys aren’t collecting any. It also would go a long way to leveling the playing field for the brick and mortars. This goes to a larger point, and it’s one that I think I agree with: the ruling itself is not a bad one. The premise is that online retailers like Amazon and Overstock get arbitrary advantages over brick-and-mortar stores in states. Their products are cheaper simply because they don’t have to charge tax. And states lose a lot of money in tax revenue by not requiring collection.
Providing small businesses with an exemption, while requiring the larger ones to comply seems to be the best way through this Supreme Court ruling. It allows states to collect the vast majority of the tax revenue they miss, gives small businesses a pass until they are more capable of complying, and makes sure the most capable and resource-rich companies fulfill the obligation.
I don’t necessarily always think that more laws are the answer. But in this case, it seems that creating one overarching law prevents us from creating 50 different ones.
Thanks for reading and thanks for listening, everyone.