Tracking sales tax in each state where one does business could be an accounting nightmare, according to one local entrepreneur.
This could soon become reality, however, after the U.S. Supreme Court hears a case that could redefine the way online retailers currently collect sales tax in places where they do not have a physical location. Under current law, if they sell something there, they don’t have to collect that state’s sales tax.
“If we have to do that 50 times per month, then I’m going to be paying my bookkeeper several hours more a month to do it,” said Danielle Fleming, founder and CEO of NOTE Fragrances, which has a growing online presence and locations in Scranton and Clarks Summit.
While larger retailers have physical locations in many states, smaller retailers, like Fleming, do not. She does pay sales tax for items sold in Pennsylvania.
“You’ll have to remit sales in each of the states where you do business, so you’ll have to do it 50 times a month and that is where the rub is,” she said. “Essentially, it takes 10 minutes to file sales tax and now someone has to spend a few hours doing that. I could see it becoming an accounting mess.”
Fleming, who sells fragrances, candles, lip balms and other items, said her online sales are roughly one-third of her entire business.
“It’s changed the dynamic,” she said.
An even playing field
More than 40 states, including Pennsylvania, are asking the high court to overturn two decade-old cases, which only required retailers to collect sales tax if they have a physical presence in that state.
Lawyers argue states like Pennsylvania are losing much needed revenue, all because of a changing shopping dynamic.
“Ideally, every seller of goods in Pennsylvania should compete on a level playing field,” said Jeffrey Johnson, spokesman for the Pennsylvania Department of Revenue. “Having a tax advantage for remote sellers means that hometown retailers are facing unfair competition.”
Johnson said in fiscal year 2017-2018, the state lost $221 million in sales tax revenue from online sales.
In an effort to get ahead of the sales tax issue, in April, Pennsylvania began requiring Amazon and eBay Inc. to collect sales tax on items sold by third party retailers. The law is known as the Pennsylvania Marketplace Act.
“This is not a new tax,” said Johnson. “Rather, this change resulted in a more efficient system for certain individuals and businesses using online marketplaces to either collect sales tax, or notify their customers that use tax may be due on their purchases. The intent of the legislation is to help brick-and-mortar stores compete on an even playing field with online sellers.”
A windfall for the state
Dr. Fred Croop, a business professor at Misericordia University said overturning the decision could mean a windfall for states like Pennsylvania.
“If they overturn this, it will open the doors,” he said. “All states and municipalities are looking for any and all money they can get. They are collecting on back taxes, parking fines – you name it. Almost all of these governmental bodies are cash-strapped.”
He said the court will have to examine the difficulty of collecting taxes in multiple states.
“The Supreme Court will have to decide the practicality of a small online business having to deal with all of the different regulations and reporting in all of these states,” he said. “It’s just going to be impossible for many of these sellers to be able to do that.”
Regardless of the decision, Fleming would like something concrete to follow.
“It would be beneficial for all of us to have a ruling we could follow because the sales tax issue seems to be up in the air and volatile, so it would be nice to have some type of ruling that would be standardized,” she said. “As a small business, accountants and bookkeepers are expensive. It would make a difference.”
“We are closely following the case that is now before the Supreme Court,” said Johnson. “We will have to see how the court rules.”
A decision is expected in July.