SCOTUS decision on internet taxes could bankrupt thousands of small online businesses

The Supreme Court ruled yesterday that states can force internet retailers to pay sales taxes, even if the company has no physical presence in that state. The ruling overturns a previous decision that kept states from assessing sales taxes on companies that did not have a store, outlet, or warehouse within a state's borders.

CNNMoney:

In making their decision, justices ruled that South Dakota can collect sales taxes from online retailers like Wayfair, which was sued by the state. In doing so, the court reversed a 1992 ruling that allowed states to levy taxes only on those businesses with a brick-and-mortar location within the state. The court said that law effectively incentivized businesses to "avoid physical presence" in states and led to "a judicially created tax shelter." Ultimately, the justices deemed the current law outdated.

"The Internet's prevalence and power have changed the dynamics of the national economy," Justice Anthony Kennedy wrote in the majority opinion. "The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes."

Sucharita Kodali, a retail analyst with Forrester, called the ruling "bad news" for thousands of major online retailers. "Now those companies have to assess taxes on customers or they get sued. For products like furniture, jewelry, electronics, people will likely start to shop local again," she said.

It isn't just the act of collecting sales tax that will prove to be a burden to small businesses. Tax compliance fees, filing fees, attorneys, accountants - all of these will be necessary in every state - and probably hundreds of counties - if the retailer has customers in that location.

Laurence Kotlikoff, a small, online retailer, writing in Forbes:

I have a small online business, www.economicsecurityplanning.com, which sells personal financial planning software. During our 25 years in business, I've lived in fear of today's decision. We have employees and, thus nexus, in 6 states. Each time we hired someone in a state, we immediately registered to pay sales taxes.

But doing so required further tasking our sales-tax processing company at, for us, a very high price, to process yet an additional state's sales tax payments. It also led, as I discovered to my horror, to our needing to file a corporate tax or gross receipts tax return in each of the 6 states, annual reports in several of the 6 states, reports in several states about workers compensation and unemployment insurance and a variety of "small" fees. The compliance cost of hiring the sales-tax processing company, paying our accountant and responding to the weekly and sometimes daily letters about filing this form or that is already costing my company $50,000 a year.

So what happens when he has to comply with tax laws from 48 states?

$50,000 a year is a huge sum for a small company, especially one like mine that is investing every penny it earns to grow and just breaking even. Based on the Supreme Court decision, my company's tax compliance bill as opposed to tax bill could easily come to $150,000 if, as I suspect, states will be emboldened by this ruling and apply what they call "economic nexus" and levy corporate income or gross receipts taxes to any company selling any products to any entity in their states.

Yes, South Dakota, which prevailed in this decision, is currently exempting, from sales taxation, small businesses with $100,000 or less in state sales or fewer than 200 individual transactions. My company's cheapest product -- www.maximizemysocialsecurity.com -- sells for $40. If we sell 200 licenses of this program to folks in South Dakota, revenue from that state will total $8,000. So it doesn't take a large dollar volume of business for my company to be forced to pay sales tax in South Dakota. Fortunately, South Dakota doesn't tax corporate income or gross receipts. But it's only one of two such states that taxes neither. The other is Wyoming.

I'm not sure that the Supreme Court Justices understood that forcing companies, large and small, to pay sales taxes will, over time, likely force companies, large and small, to pay corporate and gross receipts taxes in the 48 states that levy such taxes.

Statists have been trying to tame the wild west internet since the beginning. To tame it, they must control it. Taxation is the most basic means of control and in so doing, they will ruin thousands of independent businesses. The expected windfall for states will not materialize. Internet commerce will be severely affected, leading to far less revenue than states are greedily anticipating.

Some analysts believe that the ruling will be a boon to local brick and mortar stores. I don't think it will matter much. If most people are like me, I will simply take my business to larger online retailers, most of whom already collected sales taxes because they had a physical presence in that particular state. 

Internet websites allow tens of thousands of people to supplement their income or make a living selling online. Something went out of the internet yesterday, something important. I wonder if it will be worth it.

The Supreme Court ruled yesterday that states can force internet retailers to pay sales taxes, even if the company has no physical presence in that state. The ruling overturns a previous decision that kept states from assessing sales taxes on companies that did not have a store, outlet, or warehouse within a state's borders.

CNNMoney:

In making their decision, justices ruled that South Dakota can collect sales taxes from online retailers like Wayfair, which was sued by the state. In doing so, the court reversed a 1992 ruling that allowed states to levy taxes only on those businesses with a brick-and-mortar location within the state. The court said that law effectively incentivized businesses to "avoid physical presence" in states and led to "a judicially created tax shelter." Ultimately, the justices deemed the current law outdated.

"The Internet's prevalence and power have changed the dynamics of the national economy," Justice Anthony Kennedy wrote in the majority opinion. "The expansion of e-commerce has also increased the revenue shortfall faced by States seeking to collect their sales and use taxes."

Sucharita Kodali, a retail analyst with Forrester, called the ruling "bad news" for thousands of major online retailers. "Now those companies have to assess taxes on customers or they get sued. For products like furniture, jewelry, electronics, people will likely start to shop local again," she said.

It isn't just the act of collecting sales tax that will prove to be a burden to small businesses. Tax compliance fees, filing fees, attorneys, accountants - all of these will be necessary in every state - and probably hundreds of counties - if the retailer has customers in that location.

Laurence Kotlikoff, a small, online retailer, writing in Forbes:

I have a small online business, www.economicsecurityplanning.com, which sells personal financial planning software. During our 25 years in business, I've lived in fear of today's decision. We have employees and, thus nexus, in 6 states. Each time we hired someone in a state, we immediately registered to pay sales taxes.

But doing so required further tasking our sales-tax processing company at, for us, a very high price, to process yet an additional state's sales tax payments. It also led, as I discovered to my horror, to our needing to file a corporate tax or gross receipts tax return in each of the 6 states, annual reports in several of the 6 states, reports in several states about workers compensation and unemployment insurance and a variety of "small" fees. The compliance cost of hiring the sales-tax processing company, paying our accountant and responding to the weekly and sometimes daily letters about filing this form or that is already costing my company $50,000 a year.

So what happens when he has to comply with tax laws from 48 states?

$50,000 a year is a huge sum for a small company, especially one like mine that is investing every penny it earns to grow and just breaking even. Based on the Supreme Court decision, my company's tax compliance bill as opposed to tax bill could easily come to $150,000 if, as I suspect, states will be emboldened by this ruling and apply what they call "economic nexus" and levy corporate income or gross receipts taxes to any company selling any products to any entity in their states.

Yes, South Dakota, which prevailed in this decision, is currently exempting, from sales taxation, small businesses with $100,000 or less in state sales or fewer than 200 individual transactions. My company's cheapest product -- www.maximizemysocialsecurity.com -- sells for $40. If we sell 200 licenses of this program to folks in South Dakota, revenue from that state will total $8,000. So it doesn't take a large dollar volume of business for my company to be forced to pay sales tax in South Dakota. Fortunately, South Dakota doesn't tax corporate income or gross receipts. But it's only one of two such states that taxes neither. The other is Wyoming.

I'm not sure that the Supreme Court Justices understood that forcing companies, large and small, to pay sales taxes will, over time, likely force companies, large and small, to pay corporate and gross receipts taxes in the 48 states that levy such taxes.

Statists have been trying to tame the wild west internet since the beginning. To tame it, they must control it. Taxation is the most basic means of control and in so doing, they will ruin thousands of independent businesses. The expected windfall for states will not materialize. Internet commerce will be severely affected, leading to far less revenue than states are greedily anticipating.

Some analysts believe that the ruling will be a boon to local brick and mortar stores. I don't think it will matter much. If most people are like me, I will simply take my business to larger online retailers, most of whom already collected sales taxes because they had a physical presence in that particular state. 

Internet websites allow tens of thousands of people to supplement their income or make a living selling online. Something went out of the internet yesterday, something important. I wonder if it will be worth it.