Brad Scott says the business he and his wife run in Prescott, Arizona, has been consistently profitable, enjoying solid revenue and many loyal customers around the nation.
But for the past year or so, Scott has had trouble sleeping and spends much of his waking time scouring state government websites for updates and signs of trouble.
The reason? A Supreme Court decision in 2018 that changed the way businesses must track sales taxes – and exemptions from those taxes, if applicable – has made it much more difficult for some businesses to meet their compliance requirements, has increased costs and has boosted their liability.
Scott's company mainly generates wholesale transactions for which it doesn't collect sales tax – its customers do when they sell to consumers.
When the company receives an order from a new customer, it must make sure it has the necessary sales tax exemption paperwork on file for whichever state the customer operates in.
Those customers – mainly jewelry makers – collect sales tax on their retail transactions. His company, as a wholesaler supplying beads, chains and other materials, must maintain and manage tax exemption certificates for the various states, even if not responsible for paying any tax.
"It has become an enormous challenge trying to comply with the different state requirements," Scott said. Hardly a week goes by when his company doesn't receive a notification from a state revenue department somewhere alleging inaccurate tax remittances or other problems.
What changed was the way businesses must collect and remit taxes from their retail sales or manage wholesale exemptions.
The court's ruling, in South Dakota vs. Wayfair, mandates that companies collect taxes in each state where they generate a certain amount of revenue or number of transactions, even if they lack a store, warehouse or other physical presence. The amounts vary, but $100,000 in sales and 200 or more transactions per state is a common threshold.
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Even if a business, as a wholesaler, doesn't need to collect and remit sales taxes, it faces a paperwork burden showing that it complied with each state's exemption laws.
The flip side is that states are capturing more revenue to fund needed services from remote sellers. For example, in October and November, the first two months under the new requirement in Arizona, the state collected $51.6 million from 2,100 out-of-state businesses, the majority of which didn't previously pay, according to Ed Greenberg, a Department of Revenue spokesman.
Arizona isn't alone. States in general collect more revenue from remote sellers, said Jared Walczak, co-author of a new Tax Foundation report focused on the issue. They long were entitled to this money, he said, but compliance has been lacking.
Before the Wayfair ruling, retailers often didn't collect and remit sales tax on deliveries to customers in states where they lacked a physical presence. Nor were exemption certificates as important. Times have changed, largely because of the massive inroads made by e-commerce.
After the ruling, states updated their policies.
"Within a year of the June 2018 decision in South Dakota vs. Wayfair, nearly every state had adopted laws and regulations taking advantage of the newfound authority to tax remote sales in which the seller lacked physical presence," the Tax Foundation noted in last month's report co-written by Walczak.
Most states adopted policies requiring third-party "market facilitators" – entities that don't sell goods directly but provide a platform for sellers – to collect and remit taxes on behalf of those sellers.
The definition of "market facilitators" isn't precise and is evolving, Walczak said in an interview. Common examples include online platforms such as eBay, Amazon Marketplace, Etsy, Google Play, Uber Eats and Postmates.
Arizona is among 37 states that adopted new general remote sales tax rules as well as those for market facilitators, according to a Tax Foundation tally.
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Businesses that sell through facilitators probably will find compliance easier. For other small companies, complexities have increased.
The situation has been made worse in a handful of states, including Arizona, that allow cities and counties to impose their own tax rules. As one example, the Tax Foundation cited differing policies in Arizona, at the local level, when it comes to taxing purchases of fine art.
That said, Arizona has streamlined the retail tax situation, reducing the number of potential rates and tax complexities that businesses might face. "What this means in general terms is that the retail tax code has been reduced from 92 separate codes to one tax code, except for certain exceptions," Greenberg said.
All this places an onus on small businesses such as Halstead Bead, a 46-year-old family business run by Scott and his wife, Hilary Halstead Scott. The Prescott firm sells beads, chains and other materials to jewelry makers, who collect sales taxes. Halstead's only location is in Arizona.
On retail sales Halstead makes, the company collects sales tax, as before. What changed for the company is the need to apply for and manage out-of-state exemption certificates, required for wholesale customers, that show those transactions are exempt from sales tax.
There also is the new onus of interacting with dozens of additional state revenue departments.
Various types of new sales tax software are supposed to help simplify things. Scott said the versions he has used are expensive and difficult, yielding results that aren't recognized by tax auditors in all states.
Before the Wayfair ruling, Scott said, the company dealt very little with the revenue departments of states other than Arizona and wasn't subject to audits by those other states. Its customers collected tax when they sold jewelry at the retail level.
Halstead's sales predominantly remain tax-exempt because most of the beads and other supplies are sent to wholesalers, who fashion them into jewelry and collect tax when they make sales. But the company is responsible for collecting and keeping on file, for audit purposes, the tax exemption certificates.
Scott said he supports the level playing field created by the new sales tax rules, but he bristles at the complexities.
"Small businesses typically have one person handling all their accounting and financial needs," he said. Sales tax issues should fit into that role, not require additional staff, he said.
In Arizona, Greenberg said the Department of Revenue recognized there would be questions, especially from out-of-state businesses that had not remitted tax to Arizona before. Among its responses, the department set up an E-Commerce Compliance and Outreach team to provide guidance and answer questions about the law, including whether a business needs a license.
The ECCO team is available to assist Arizona companies trying to comply with policies enacted by other states, Greenberg said in an email.
Walczak at the Tax Foundation said he thinks the new compliance burdens are greatest for companies that don't sell through marketplace facilitators such as Amazon or eBay. The challenges also are more acute for businesses that conduct a lot of small-dollar transactions spread around the nation.
That largely describes Halstead, for which rising costs and tax liability woes have been such that the company considered closing shop, Scott said. It might stop doing business in states with tax departments and laws that are especially difficult.
Walczak agreed that states overall haven't done enough to ease the burden. "Even in states that are doing it right, there are complexities … and costs associated with compliance," he said.
Scott figures Halstead incurs about $2.39 in additional expenses for every $1 it collects in sales taxes. In the aftermath of the Wayfair ruling in June 2018, Halstead has had more than $162,000 in costs to collect $68,000 in sales taxes, Scott said.
"We have diverted 3,300 hours of time away from our operations to deal with sales taxes," he said.
The main expenses and time drain are in information technology, as Halstead has needed to integrate its accounting, shipping and inventory practices with the new sales tax reporting requirements.
A survey in October by the American Catalog Mailers Association reported sales declines and rising expenses among its members as a result of the new tax obligations. About 89% of small-business respondents voiced concerns about audits, and companies cited initial outlays of up to $275,000 for sales tax software and consulting.
Halstead hasn't lost revenue as a result of Wayfair and was able to pass along the higher expenses by raising prices more than 9%. It's unclear how much longer it can keep doing that before customers balk. The company generates about $6 million yearly in revenue.
The ruling has cost jobs, Scott said. The company let its staff shrink, through attrition, from 32 employees to 28 over the past year or so. The Scotts want to accumulate more assets in case they face unexpected financial demands from state auditors.
Sales taxes are considered to be held in trust by a business for eventual payment to state and local governments. If an auditor assesses a large tax bill or penalty, the business would need to pay it, virtually immediately. If business assets weren't sufficient, a firm's owners in some cases might need to liquidate personal assets such as homes, vehicles or investment accounts.
"We're stockpiling money in case of audits or fines," Scott said.
Halstead hired a specialty law/accounting firm to conduct an audit of its sales tax practices and, Scott said, received a clean bill of health. It spent $24,000 in the process. Increased costs for accounting and legal assistance have been another byproduct of the Wayfair ruling for the company.
Scott suspects that many other small-business owners, perhaps most, "probably aren't aware of their obligations." If they are aware, they might not want to speak out for fear of incurring the wrath of state revenue auditors.
It remains to be seen if the various states can adopt policies that help small businesses comply with the rules without strangling their operations.
Congress has the power to change the law but has been reluctant to do so, Walczak said. States, which are generating more revenue, don't have much incentive to ask the federal government to get involved.
"Small businesses are in a tight spot," Walczak said. "They don't have time to Google what each tax rate is for every transaction," yet they face a host of increased responsibilities.
Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.
This article originally appeared on Arizona Republic: Wayfair ruling from U.S. Supreme Court menaces some small businesses
