Hearing Witnesses Say South Dakota's Online Sales-Tax Win Is Hurting Small Businesses

Mar 3, 2020

Linda Lester, of K-Log Inc. in Illinois, and Kevin Mahoney, of FindTape.com in New Jersey, appear at a congressional subcommittee hearing Tuesday on the impact of the South Dakota v. Wayfair ruling.
Credit Small Business Subcommittee on Economic Growth, Tax, and Capital Access

South Dakota’s court victory over online sellers has been disastrous for small businesses across the country, according to testimony offered Tuesday at a congressional subcommittee hearing

The state won a landmark U.S. Supreme Court ruling in 2018 against the online retailer Wayfair. Because of the Wayfair ruling, South Dakota and other states can now impose sales taxes on remote sales.  

In other words, if an out-of-state company makes an online sale to somebody in South Dakota, the state of South Dakota can require that company to collect and remit sales tax.  

That’s been great for South Dakota’s budget. The state’s sales-tax revenue from remote sellers grew by about $17.5 million last year

But the Wayfair ruling has been a complicated disaster for some small businesses, according to Brad Scott. His family owns Halstead Bead, an Arizona company that sells beads and jewelry components. 

“At Halstead, we have a successful, profitable small business. We have prospered in our 47 years, but nothing has shaken us like Wayfair,” Scott said. “We have considered closing our doors because of the stress and liability. We could literally lose everything. We urgently need federal intervention.” 

Scott testified during a hearing of the U.S. House Small Business Subcommittee on Economic Growth, Tax and Capital Access. The hearing was described as the first to focus solely on the Wayfair ruling’s impact on small businesses. 

According to Scott and others who testified, one of the problems they face because of the Wayfair ruling is their exposure to a thicket of sales-tax laws and regulations across the country. A memorandum prepared by the subcommittee said there are 45 states and more than 10,000 local governments that levy sales taxes. Many of them charge different rates, allow different exemptions and have other unique rules. Scott said wading through all that bureaucracy to ensure his company’s compliance is costing thousands of hours and dollars. 

Linda Lester is vice president of K-Log, an Illinois company that sells office furniture. She expressed similar frustrations. 

“I am not opposed to collecting and remitting sales taxes in all states,” Lester said. “My struggle is with the chaotic manner in which remote sales tax has been mandated, as well as the expense in time, money and energy these mandates have imposed.” 

The hearing was spearheaded by two congressmen: Democrat Andy Kim of New Jersey and Republican Kevin Hern of Oklahoma. They’re seeking ways to make compliance easier for small businesses, which could lead to legislation.  

Several ideas were floated during the hearing. Many suggested making state sales-tax laws and rules more consistent.  

Lester said each state should establish special “interstate” sales tax rates, so remote sellers don’t have to know the additional rates of thousands of local governments. She said sellers could collect at the simplified interstate rates, and then report and remit everything in the sellers’ home states. The states, rather than the sellers, would then be responsible for sending tax collections to the appropriate state and local jurisdictions. 

Rep. Kim said he hopes those and other suggestions will guide Congress toward a legislative fix. 

“The landscape post-Wayfair is that millions of small businesses are unfairly faced with overwhelming and expensive compliance burdens,” Kim said. “These burdens unfairly limit the ability of small business owners to offer their products and services across state lines.”