Winners and losers in sales tax ruling? Too many — and too early — to tell

States get more revenue, brick-and-mortar companies get level playing field, small businesses may get crushed in audits and bookkeeping costs

By Brett Johnson
New Jersey | Jun 22, 2018 at 4:03 am

A U.S. Supreme Court decision Thursday that allows for sales tax on e-commerce should mean added revenue for the state of New Jersey — and added problems for small business owners.

At least, that was the opinion of Tom Corrie, principal at Friedman LLP and director of the firm’s state and local tax group.

Such is the result of the 5-4 ruling in the South Dakota v. Wayfair case, which paved the way for states to start forcing retailers to collect state sales tax when their residents make purchases from companies online.

The decision, which overturned a precedent that has held since 1992, will have significant impact in New Jersey.

The state figures to benefit just by virtue of it having a large population with robust purchasing power — and therefore figures to have plenty of purchases that now can be taxed.

The state, however, does not necessarily benefit from its numerous, soon-to-be 10, Amazon distribution centers — because products will be taxed in the state they are purchased, not where they are sold.

“With this latest decision, the location of inventory isn’t all that important anymore,” Corrie said. “In that sense, New Jersey’s amount of fulfillment centers is not what will make the biggest difference for the state.”

This is why small businesses in the state may be hurt.

In the prior, precedent-setting Supreme Court case, Quill Corp. v. North Dakota, it was decided that physical presence in a state was required for a business to be state sales tax-liable when selling across state borders. Sales tax nexus — as it’s referred to in accounting lingo — could be established by businesses having offices or employees based in another state.

It could also potentially be triggered by businesses storing inventory in another state, although some level of uncertainty existed over the years about the status of inventory held by third-party fulfillment service providers, such as those that now dot the landscape up and down the New Jersey Turnpike.

“Assuming New Jersey enacts legislation after this, (e-commerce) businesses across the nation are going to become subject to the state’s sales tax, whereas they may not have been before,” he said.

However, as an accountant who has many local businesses with online sales as clients, Corrie is unhappy seeing the former rules jettisoned.

Corrie said he’s worried about its potentially disastrous results for the state’s small business community.

Business owners that may be only making $1 million in revenue each year through a minor e-commerce operation could now be tasked with defending themselves against tough state-imposed tax legislation that even industry giants are expected to struggle with.

“As that business owner, suddenly I’m responsible for collecting sales tax in 15 or 20 different jurisdictions,” Corrie said. “At some point of time, I’m going to be audited by some of those jurisdictions — it’s just the nature of the game.

“So, I’m here in New Jersey, having to defend a sales tax audit in Louisiana, only because I happened to sell their residents $40,000 in product over the internet.”

His assessment is that the hefty accounting and legal resources that may become a prerequisite in this new e-commerce landscape will have an effect on how many of these businesses can survive.

“Small businesses are not likely to have sufficient economic resources to be able to sustain such challenges or adequately defend themselves against multiple state sales tax audits,” he said.

The expectation that the new tax reporting burden will fall disproportionately on small online retailers has gotten lost in the speculation about the impact that will be felt by industry giants such as Amazon, Corrie said.

And Corrie believes that’s not only consequence of the ruling that be getting overlooked.

“One of them is that there’s a big push to get women involved in businesses — and, if you look at U.S. Department of Labor statistics, 99.9 percent of women-owned businesses are considered small business,” he said. “So, I think the impact on them will be dramatic.”

The court’s decision did not provide clarity on how low a threshold states could set for sales tax nexus, which Corrie said could leave the door open for laws that subject a company to tax reporting obligations based on a very small amount of transactions.

In the end, the impact of this verdict is still something that’s being explored. And Corrie admits that not all businesses have a problem with what they’re hearing about it.

“There has been a diverse reaction, even locally,” he said. “You have brick-and-mortar businesses in the state that have had problems competing with remote sellers.

“So, this is a bone thrown to those traditional stores; and they’re probably rejoicing the decision.”

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