Supporters of the Supreme Court’s South Dakota v. Wayfair Inc. state sales tax decision are hailing it as a victory for mom and pops — but a Michigan consultant said that proof remains to be seen.
The decision handed down June 21 allows states to charge sales tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state.
In South Dakota, retailers with annual sales of more than $100,000 or with more than 200 transactions in a 12-month period are now required to collect and remit sales tax at the state’s rate of 4.5 percent.
Michael Bannasch, a multistate sales and use tax consultant at Rehmann’s Ann Arbor office, said about 20 to 25 other states have or are in the process of implementing similar models — including Michigan.
On Aug. 1, Gov. Rick Snyder approved Revenue Administrative Bulletin 2018-16, which is the Michigan Department of Treasury’s interpretation of the Wayfair ruling.
It uses “old language” in past Michigan statutes to allow the state to “administratively impose the same economic thresholds as the South Dakota case had,” Bannasch said. The only difference would be that the sales tax rate in Michigan is 6 percent.
The state will begin enforcing the new standards Oct. 1.
“What that means is you’ll look back on 2018 and say, ‘Was I over those thresholds for 2018?’ and if so, you will need to start collecting sales tax for out-of-state sales,” Bannasch said.
He noted this won’t affect local businesses if they are selling only to local customers.
The South Dakota vs. Wayfair Inc. ruling was largely aimed at creating a level playing field between smaller outfits and large online retailers such as Wayfair, Overstock.com and Newegg, which did not have to collect sales tax except on purchases made in states where the retailers had a physical presence.
In theory, proponents say the ruling should make it easier for mom and pop, brick-and-mortar stores to compete with online giants, which previously were able to undercut small businesses by selling tax-free goods.
But the “level playing field” goal the decision was meant to foster is not as smooth as proponents imply, Bannasch said.
“Any silver lining you might mention, there’s another side that says, ‘Yeah, but … ,’” he said.
For instance, the decision could have a boomerang effect and stunt small business growth.
“If the mom and pop businesses want to themselves have an online presence, they will now have to collect sales tax in other states when they have customers buying from them online, and that will be a big burden and a disincentive for them to explore that growth market,” Bannasch said.
The case doesn’t just affect online retailers. It affects any sellers that take phone, email and catalog orders or do other forms of commerce with customers outside of a state where they have a physical presence.
The changes will particularly impact small businesses such as one of Bannasch’s clients that was doing e-commerce but consciously chose not to expand its physical presence outside Michigan to avoid dealing with the state sales tax headaches.
“Now, that company still sitting here in Michigan will have to collect in 20 to 25 states and, likely, ultimately, all 45 states that have sales tax,” Bannasch said.
On top of retailers having to collect in more places, they will have to learn which products are taxable — since states tax goods and services differently — as well as what the tax rates are in each place, how to collect and do a monthly remittance, and how to keep records and file multistate taxes to the Internal Revenue Service.
The logistics of implementation are doable if small businesses buy the right software and hire an accountant or tax professional, Bannasch said.
But all of those administrative costs — the “calculating, collecting and remitting” — add up.
The administrative expense either cuts into profit margins or necessitates passing the cost on to the customers, who likely already will be feeling sticker shock from price hikes the retailers use to cover the new taxes.
“Some clients are saying, ‘The good news for me is I can do that because I have a niche product, and my customers won’t be able to find another place to buy it,’” Bannasch said.
But other small businesses could lose customers to their competitors that are evading paying multistate sales taxes as they wait for bigger companies to fight the Wayfair ruling in courts.
Bannasch said some business owners have done studies about what would happen if they added a sales tax to their products, and in some cases, sales dropped by as much as 50 percent.
“It’s a huge business decision,” he said.
Tips for compliance
The good news, Bannasch said, is qualifying sellers can get free software to help with compliance and audit protection under the Streamlined Sales and Use Tax Agreement of 2000. More information is available at streamlinedsalestax.org.
He also said he would “highly encourage” retail business owners to consult with an accountant and research software that offers multistate tax solutions before Oct. 1.