|With a vast online sales operation to keep in compliance, Sweetwater is an authority on the impact of the Supreme Court ruling.|
What The Court Ruling On Mail Order Sales Tax Means In Practice
Sweetwater CEO Chuck Surack explains the challenges and opportunities of complying with the sales tax laws in the nation’s 11,000 jurisdictions.
AS HEAD OF SWEETWATER, the country’s largest online m.i. retailer, Chuck Surack has no problem in principle with Wayfair vs. South Dakota, the recent Supreme Court decision that allows sales tax collection on out-of-state transactions. “I don’t begrudge any state the right to collect sales tax on Sweetwater sales,” he says. However, ask him about how the ruling is being put into practice, and he remarks, “I’m disappointed that the court didn’t provide better guidance.” What he’s referring to is the lack of a clear road map for navigating how to collect and remit sales tax in each of the nation’s 11,000 sales tax jurisdictions. To date, Sweetwater has spent about $1.0 million on legal and consulting fees, developing the systems necessary to comply, but the task remains far from complete. “Brick-and-mortar retailers have called the old sales tax exemption unfair,” he states. “I think you could say the new compliance burden being placed on online sellers is unfair too.”
Forty-seven of the nation’s 50 states impose a sales tax, but within each state there are often multiple sub jurisdictions with different rules regarding the tax rate and items to be taxed. Texas has about 1,500 separate jurisdictions, Ohio has 80, and New York has 56. Further complicating matters, some jurisdictions offer sales tax holidays at specific times of the year and some give sales tax exemptions to churches and schools while others don’t. Sweetwater is using software from the developer Avalara to calculate tax liabilities in each jurisdiction. However, many states have yet to develop their collection protocols, so it is uncertain how to remit the taxes and properly comply. “Some are taking a very aggressive approach, others are dragging their feet, and some are in between,” says Surack. By the end of October, he anticipates remitting sales tax in 20 states. The activities in state capitals will determine the timetable for coming into compliance with the other states.
With no further incentive to avoid
having a "physical presence"
in any state, Surack envisions more
"I think we can turn lemons
What has been largely overlooked in the Wayfair vs. South Dakota ruling is that it affects state income taxes as well as sales tax. When the Court first addressed mail order sales tax in the 1992 Quill case, it ruled that a retailer had to have a “nexus,” or physical presence, in a state to be liable for collecting sales tax. In the recent decision, the court concluded that with advances in technology, an app or website could be counted as a “nexus.” States are seizing on this interpretation to impose corporate income tax on out-of-state sellers. Thus, if Sweetwater were to generate 10% of its revenue in another state, that state could levy its income tax on 10% of Sweetwater’s profits. The details remain to be worked out, but Surack anticipates filing income tax returns in multiple states in the near future.
Sweetwater’s scale—annual revenues of $620 million—make it a ready target for state taxing agencies. Surack says the company regularly receives payment demands from state treasury departments, adding “we have a bullseye on our back.” However, the company’s large administrative staff and robust IT systems have made it better equipped to deal with the new complexities of tax compliance. eBay lobbied vigorously to prevent cross-border sales tax collection, arguing that it would adversely affect the small sellers who use its platform. Surack says that eBay’s concerns were not misplaced. “Smaller businesses will have a difficult time complying with the new rules,” he adds.
Brick-and-mortar retailers have long argued that the sales tax exemption provided online sellers with an unfair competitive advantage. They note that the resulting 5% to 10% price differential could make or break a sale, particularly among price conscious musicians. How will the loss of this pricing advantage impact Sweetwater’s business? “We think the services we offer, like a two-year warranty, and the relationships we have with our customers, will allow us to overcome that 5% to 10% delta,” says Surack. “We started collecting sales tax in June and haven’t seen any impact at all.” In addition, he notes that since national retailers like Amazon and Apple have been collecting sales tax for several years, “consumers have become accustomed to paying sales tax on mail order purchases.”
While the new tax laws have created an additional administrative burden for Sweetwater, they have also opened new sales and marketing opportunities. In the past, the company steered clear of any physical presence outside of its home state of Indiana to avoid incurring a tax liability. That meant no out-of-state sales visits, no participation in out-of-state tradeshows, and no out-of-state warehouses or sales offices. In the new environment, Surack envisions participating in events like the Christian Music Conference, sending sales engineers out-of-state to work on audio installations, and even strategically making use of billboard advertising. “I think we can turn lemons into lemonade,” he concludes.
Ultimately, though, Surack sees new tax compliance issues as a momentary problem. “All businesses have their challenges, and this is just one of them. We’ll just work through it,” he says.