Law & the Courts

States Angle for More Sales Tax, Small Businesses and Inflation Be Damned

South Dakota seeks to place extreme administrative burdens on out-of-state sellers.

The State of South Dakota is making a judicial power play that has the retail world on edge. It has taken its case, South Dakota v. Wayfair, Inc., to the Supreme Court, and the outcome could affect millions of small, online retailers and brick-and-mortar companies that ship across state lines, subjecting them to abusive treatment by the states. The Supreme Court will hear oral arguments on April 17. Twenty-two groups have filed amicus curiae briefs in support of Wayfair, citing the enormous burdens that would be placed on the U.S. economy if South Dakota were to win this case.

You may not realize it, but this case affects you and everyone you know.

This case hinges on whether South Dakota has the authority to burden interstate commerce by forcing out-of-state sellers to collect sales tax if in one year in South Dakota they make a minimum of either 200 sales or $100,000 in sales. Specifically, South Dakota seeks to overturn Quill Corp. v. North Dakota, which forbids a state to collect sales tax unless the seller has a “physical presence” in that state. If the seller does not, the in-state purchaser must pay a use tax on the good or service. If the Supreme Court agrees with South Dakota, the practical effect will be that almost every retailer with any sales across state lines will have to register and collect sales tax in every state.

But seriously — aren’t we just talking about collecting sales tax and turning it over to the state? Don’t we have software that can do this easily? This is what South Dakota would like everyone to believe. The reality is very different.

I am an attorney and a certified public accountant whose law firm of twelve attorneys is focused on almost exclusively defending business in sales-tax matters. My experience makes it clear why overturning Quill would hurt small retailers with scant resources. Here are just some of the realities South Dakota does not want you or the Supreme Court to realize:

• Overturning Quill would mean that all businesses would have to know the constantly changing sales-tax laws, rules, and court cases in 45 states and over 10,000 local sales-tax jurisdictions. Even the largest and most sophisticated companies in the country can’t keep up with all the changes in sales-tax laws.

• A business not only has to collect the sales tax. It also becomes liable for the tax. So any mistake or missing piece of paperwork makes the business liable for taxes never collected from customers.

• Business would be subject to expensive, multi-year sales-tax audits — on average, eight audits per year. The average sales-tax assessment for even a medium business under audit is over $100,000.

• The states take hundreds of millions of dollars a year from businesses by auditing out-of-state businesses for sales tax. Florida alone rakes in over $200 million a year auditing companies, with two-thirds of that coming from companies located outside Florida.

• Unlike income tax, sales tax is considered a trust fund held by the business. This means that a business and the owners are subject to harsh civil and criminal penalties that can’t be extinguished by bankruptcy.

• In Florida, a person’s failure to remit just $301 of collected sales tax subjects the responsible person to felony charges and a whopping five years in prison (30 years if the amount exceeds $100,000). With eight out of ten businesses failing within five years, many owing sales tax, the reality is that many cases a failed business owner could be facing more than 100 years of jail time spread over multiple jurisdictions.

• Small-business owners may not rely on corporate shell protection when it comes to sales tax. Most states have laws that allow the state to pierce the corporate veil to impose penalties on business owners who fail to pay sales-tax liabilities, fining them up to 200 percent of the tax owed.

• If Quill is overturned, then businesses will raise prices on everything to account for the administrative burden and risks associated with collecting sales tax throughout the country. The inflationary effects will be felt by everyone.

While the Framers never anticipated ecommerce, they did anticipate the need to protect the national economy from the states’ obsessive hunger for revenue. Under the Articles of Confederation, the precursor to our Constitution, the colonies aggressively taxed out-of-state commerce, damaging the overall integrity of our country. As a result, we added the commerce clause to the Constitution, granting the federal government the exclusive ability to regulate interstate commerce.

To date, the Supreme Court has protected our national economy by stopping aggressive states from taxing beyond their borders. The Court has instead imposed reasonable, bright-line rules for businesses. Any further regulation of interstate commerce has been left to the one place our Constitution requires — Congress. Though the wheels of government are grinding especially slow in this case, solutions are in the works. The Supreme Court should exercise restraint and let those wheels keep turning.

James H. Sutton is an attorney, a certified public accountant, and a partner in the law firm Moffa, Sutton & Donnini, which represents clients across Florida and the United States against the Florida Department of Revenue. He serves as the state and local tax director for the American Academy of Attorney-CPAs.


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