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Supreme Court online tax decision sends smaller businesses reeling

"Now I have to keep track of the tax laws and collect and report tax in 50 states and over 3,000 counties," said one online merchant.
by Erik Sherman /  / Updated 
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When Vince Kadlubek initially heard about Supreme Court decision to make states require online sellers to collect sales tax, he was fine with it. CEO of art collective Meow Wolf, his group brings in $12 million a year, mostly from admissions to its New Mexico art attraction. Most of the tickets are sold online. Helping the state with more revenue was a way to pay back.

Then he heard it could mean collecting sales tax for other states.

"This is going to be a headache," Kadlubek told NBC News. "That makes me really think twice about whether or not we push online sales as a component of our company. I'd much rather have people buy their tickets at our front desk and keep the tax local."

The problem for Meow Wolf and millions of other small to mid-sized online retailers is how to comply, and quickly, with the demands that will likely come spilling out of statehouses and possibly from local governments across the country. Estimates of the sales taxes lost to sellers outside of a jurisdiction run between $8 billion and $33 billion a year, according to the Supreme Court decision.

Depending on where companies stand, they have different reactions to the ruling. Companies with a physical retail presence have largely cheered the decision. "We think this levels the playing field and promotes competition," said Tom McGee, CEO of the International Council of Shopping Centers. "We've been operating in a system where we've been at a competitive disadvantage."

But convenience and greater variety often drive consumers online. It's unclear how much impact the inclusion of sales tax, other than more expensive items where the amounts can be significant, will have on e-commerce.

States also gain. Consumers in most states are technically liable for paying a use tax, equivalent to the sales, for online purchases, but relatively few do. "There was very little voluntary compliance with the use tax," said Rocky Cummings of the accounting, tax, and advisory firm BDO. "If you have a million residents buying stuff online, you're not going to chase a million people. It's much easier to go after the seller to collect it all."

But the amount won't be a windfall. "We're talking about maybe 5 percent to 7 percent jump [in annual revenue]," said John Mikesell, an expert in government finance and professor emeritus of Indiana University’s School of Public and Environmental Affairs. "That's good for states, but it's not probably enough to say we followed the yellow brick road and we're in the land of Oz."

Can companies deliver?

Big online sellers like Amazon, Walmart, and Target already frequently collect state taxes, but not local. "Even Amazon is not immune from having some work to do," Mikesell told NBC News. "This opens the door for them having to worry about local tax as well."

But the big players have a massive technical advantage over small sellers, and so are comfortable with the change overall. A statement from Target read in part, "We are pleased the Court’s ruling will close the loophole that has allowed online-only retailers to avoid collecting and remitting sales taxes while still requiring local businesses to do so."

It's small to mid-sized businesses that face the biggest problems because of the complexity of compliance, according to Darcy Kooiker at national tax firm Ryan. "Each state gets to determine whether the products, goods, and services sold by the sellers should be subject to that state's sales tax," she said. "Part of the biggest challenge for the sellers is to know in each particular state if its goods and services are subject to sales tax, because there's no uniform definition."

There's also the issue of when a seller has to collect tax. North Dakota opted for $100,000 of sales in the state or 200 transactions, but there is no reason for other states to do exactly the same, complicating the matter.

"This makes life very difficult for people like me," said Allen Walton, CEO of SpyGuy.com, which sells security equipment. "Now I have to keep track of the tax laws and collect and report tax in 50 states and over 3,000 counties."

There are services that can calculate the taxes; however, that's only half the battle. The companies must remit the amounts they collect to the proper authorities. If your company is small and you pay anywhere from $20 to $60 to each of dozens — or maybe hundreds or more — jurisdictions each quarter, "it can add up," Cummings said.

Hart Posen, an associate professor of management and human resources at the Wisconsin School of Business, thinks that as a result, this could become a boon for Amazon. "It is easy for a seller using Amazon’s platform to collect and remit sales tax. This should further push small retailers toward Amazon’s platform," he said. That gives the online giant even more leverage.

Clock is ticking

Companies have virtually no time to react. A number of states had already passed laws to trigger tax collection if the Supreme Court decided as it did.

That means companies selling into these states have already missed the deadline if they aren't set, and that generally will mean the smaller businesses. Their choices: get immediate compliance, run the risk of an audit and fines from multiple states, or not bother with sales into other states — which might translate into going out of business.

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