Within days the U.S. Supreme Court will hear arguments on South Dakota v. Wayfair, Inc., shaping its decision on whether state sales tax should be imposed on out-of-state retailers.
XI am no expert in the dormant commerce clause or the finer points of constitutional law. But I do hope the court takes a moment to ask: What is the difference between a Kit Kat bar and a Milky Way? Or a cut bagel and an uncut bagel?
Answer: In New York, uncut bagels are not taxed, while cut bagels are. In Iowa, Kit-Kat bars are not taxed because they have flour in them, but flourless Milky Ways are.
If the court overturns existing precedent, millions of small retailers will have to manage such arcana of 45 state tax codes. These range from the quirky — exemptions for cowboy boots in Texas, or racecar parts in Indiana — to wildly different exemptions for clothing, groceries or medication.
South Dakota and its allies are trying to sell us on the notion that technology makes the task of compliance an afterthought, when it would be expensive and burdensome. South Dakota might be willing to make misguided assumptions about the ability of tax compliance software to keep small retailers within the law, but the Supreme Court must not.
Some proposals call for the states to provide free tax compliance software. From firsthand experience, I know that if the court rules in South Dakota's favor and allows sales tax to be collected on online sales, there is no software that can cover every online businesses' complex sales tax use case. The court will be subjecting millions of small business owners to confusion, audits and an invitation to close shop.
In the online retail world, the prevailing rule is that a company must only collect a state's sales tax if it has a physical presence or "nexus" in that state. Calculating sales tax to the penny is a difficult and time-consuming process. Most large online retailers, like Amazon or Walmart, have a physical presence, so they already pay state taxes. This is a light burden for Fortune 500s with armies of accountants and lawyers to ensure compliance. Small-scale retailers, however, are mostly do-it-yourselfers.
Lawmakers argue that with all the revolutionary software changing the world, surely we can slap a sales tax calculator together? In five years, my company TaxJar has become the market's lead provider of software to independent sellers, allowing them to virtually eliminate much of the burden of tax compliance.
In nearly every case, I am an advocate for the expansion and use of software, but in this instance, we should pump the brakes.
Should the states provide tax compliance software for free, you would likely get what you pay for. The justices should know that software currently in existence is nowhere near being the work-around that some argue it is. For example, TaxJar currently supports around 14 online "shopping cart" platforms.
But the ecommerce ecosystem is made up of thousands of these platforms adapted for all kinds of niche sellers, from those who sell collectible coins to those who sell hand-crafted goods.
So a new software would first have to solve the problem of integrating every "shopping cart" platform for selling goods online into one software application. This one-stop shop for state sales tax would also have to account for every permutation of state sales tax law in all 45 states.
Staying current with state laws is a full-time process for TaxJar. We are continually updating our software. The idea that we could just wave a magic wand and do what we do for 14 platforms for the thousands of others is risible. If the states or the federal government were to contract out the development of such a software, how many years would it take them to complete it? And would it be outdated by changing state laws and regulations the moment it was released?
Some policymakers have proposed software be developed and provided free by each state. But there are complications. Would that require retailers to download 45 separate tax software programs? How many people would give up their business before facing such a nightmare? A universal affordable software solution for small online retailers is unlikely to come about for many years.
At the very least, I hope this realization gives the justices something to chew on.
- Faggiano is the founder and CEO of TaxJar.
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