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Sales-Tax Ruling Strains Small Online Sellers

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12/29/2019 | 05:45am EDT

By Ruth Simon

Eighteen months after the Supreme Court gave states the green light to tax online transactions, small companies that sell things as diverse as recycled yarn and gold bullion are struggling to adjust.

Nicole Snow, chief executive of Darn Good Yarn Inc. in Clifton Park, N.Y., hired a part-time chief financial officer and purchased new sales-tax software in response to the court ruling. Her 21-person company will spend about $25,000 this year to collect and remit about $90,000 in taxes on $5.4 million in sales to buyers in 34 states.

"It's quite a big lift for us," Ms. Snow said. "There is a lot of complexity for a small company."

In its June 2018 ruling, the Supreme Court held that states had the authority to make online retailers collect sales taxes even if they didn't maintain a store, warehouse or other physical presence. Before the decision, consumers were supposed to pay what is known as use tax on out-of-state purchases, but most didn't.

The decision came in a lawsuit filed by South Dakota against home-furnishings retailer Wayfair Inc. and other online sellers.

What is taxed and how often those taxes are paid varies from state to state. Some states, such as Colorado, allow localities to administer their own taxes. Some states share definitions and procedures to make it easier for companies to comply, but some of the biggest jurisdictions have their own rules.

"Small businesses are definitely the ones that are really adversely affected," said Clark Calhoun, a state and local tax attorney in Atlanta. "A bigger business is typically going to have more robust sales-tax software," he said, as well as "a better sense of where their products are going and will be well over the sales thresholds every single year."

Verenda Smith, deputy director of the Federation of Tax Administrators, which represents state taxing authorities, said the state laws were never intended to affect small businesses. But "the fairness issue is equally on the table, and it can be at odds with the burden issue," she said.

Most states have tried to limit the impact on the smallest companies, with many following the lead of South Dakota, which exempted out-of-state sellers with $100,000 or less in sales or fewer than 200 transactions in the state per year. But limits vary, with a threshold of $500,000 in California and none in Kansas.

In another step to make it easier for smaller sellers, 38 states and the District of Columbia have enacted laws requiring marketplaces such as Amazon.com Inc., Etsy Inc. and eBay Inc. to collect and remit sales tax for third-party sellers, according to the National Conference of State Legislatures.

Still, business owners have struggled to determine whether they exceed the state cutoffs and how to comply. Joe Wood, owner of TechWholesale.com, which sells two-way radios in all 50 states, said it took more than a week to determine that his one-person company didn't trip any state sales-tax requirements, though it came close in a handful of states.

"It's the biggest single moment of anxiety I've had businesswise in the last 10 years," said Mr. Wood, who runs his business from the bedroom of his Covington, Ky., home. "We would have had to bring on an accountant, and I can't fit one in my bedroom."

Software tools can simplify tax collection and reporting, but business owners typically must first categorize a product or service to make sure it receives proper tax treatment. "You need to do it with granularity," said Scott Peterson, a vice president with tax-compliance-software company Avalara Inc.

JM Bullion Inc., an online seller of precious metal bars and coins, created a custom sales-tax collection system after determining the big tax-software vendors didn't understand the intricacies of its industry. That turned out to be a three-month job for the company's 10-person software-development team.

"It was a huge resource drain on our organization," said Michael Wittmeyer, CEO of the 50-person company, which has about $600 million in revenue.

Some small sellers are juggling multiple tax challenges. Kevin Mahoney, president of FindTape.com in Skillman, N.J., now spends a full day or two each month on the sales-tax requirements of 35 states. Abandonment rates for smaller orders have jumped as customers balk at paying sales tax on purchases of adhesive tape.

The growth of internet sales has created an additional tax challenge. The $6.5 million retailer is being audited by Washington state, which says it has a physical presence in the state because products the tape company shipped to an Amazon warehouse in New Jersey were then transshipped by Amazon to a fulfillment center in Washington state.

After the Wayfair decision, Washington state began "working to bring remote sellers into compliance with our laws," said Patti Wilson, head of the marketplace-fairness team for the state's Department of Revenue. Through those conversations, the state found that "some remote sellers are selling through a marketplace and have goods stored in our state." As of October 2018, marketplaces are required to collect sales taxes on behalf of individual sellers, whether or not they have a physical presence, she added.

Some businesses are still getting everything in place. Gruber Industries Inc., a manufacturer of low-voltage cable products and a provider of power services, spent about a year figuring out its tax obligations and, in September, began moving to a new tax-calculation software. The Phoenix company now collects sales taxes in 36 states, up from 11 before the Wayfair ruling.

"We should be done by January 2020," Chief Financial Officer Mark Schaeffner said. "The biggest surprise to us was the amount of complexity."

Write to Ruth Simon at ruth.simon@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
COLORADO 0.00% 48.97 End-of-day quote.-12.40%
EBAY INC. 0.07% 30.18 Delayed Quote.-16.42%
THE PHOENIX HOLDINGS LTD 7.50% 1635 Delayed Quote.-26.20%
WAYFAIR INC. -15.94% 46.3 Delayed Quote.-48.77%
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