Online retailers brace for changes after tax ruling

Last month the Supreme Court ruled that states can require internet retailers to collect sales tax for online transactions in their state, even if the merchant doesn’t have a physical presence in the state.

The ruling will have a significant impact on online retailers everywhere, but it’s amplified in states with no sales tax, such as Montana. The decision in South Dakota v. Wayfair, Inc. means retailers based in Montana could be required to pay out more sales tax to other states, but Montana will receive no additional compensation for products purchased by people who reside here.

The decision could raise the cost of doing business for online retailers in the state and eliminate some of the advantages they have enjoyed over traditional brick and mortar businesses. Now, when Montana retailers make online sales to states with a sales tax, they may have to charge, collect and distribute that tax to their buyer’s state.

One retailer from the Flathead Valley says that if small businesses aren’t given an exemption from the new ruling, they could flounder in a sea of tax-related administrative paperwork.

Coleen Rast owns Evergreen-based Great Sky Gifts. She is hoping protections for small businesses will be preserved in the future, and said some plans currently being prepared by congressional members carve out that exemption while others do not.

“I understand why they are doing it, the states clearly need the money,” Rast told the Inter Lake in a recent interview.

She said it was reasonable to expect large corporations to pay into state coffers when they have high profits and the resources to handle the accounting work. However, the stress the changes could put on small businesses like hers could bend them to the breaking point.

“I’m a four-person operation,” Rast said. “I don’t have the time or resources to keep up with that.”

Rast’s business ships a variety of items including clothes, locally made huckleberry products and antiques to online buyers all over the country. She has a warehouse in Evergreen where she and three employees ship orders from.

Rast, who is active with eBay’s government relations team and signed onto a brief submitted to the Supreme Court by the company in support of maintaining the status quo, understands that states are simply looking to cut out loopholes and collect public tax revenue to help them provide services.

But she also points out that while big corporations like Amazon do make a lot of money selling products to people in those states, it is often smaller merchants like her that are filling those orders and providing the products. The big corporation is merely a facilitator, and an added tax will hit her even harder than it will affect those giant companies she works through.

In South Dakota, the state Legislature passed a law in 2016 that required merchants that sell more than $100,000 worth of merchandise or make more than 200 transactions, pay the sales tax. The state claimed that the “outdated physical-presence rule causes outsize harms to state treasuries and fundamental fairness among retailers.” South Dakota lacks a state income tax, so it relies especially heavily on sales tax revenues.

That law and the state’s attempt to enforce it spurred the lawsuit that was recently decided by the Supreme Court.

Rast thinks that $100,000 or 200 transactions is an acceptable level for a rural state like South Dakota, and said she is open to putting sales limits on tax-free transactions, but thinks it should change based on the size of the state.

“I can sell $100,000 all day long to California because of the population, but not in South Dakota,” Rast said.

She also noted that she sometimes sells high-value products like antique cars. One problem with minimum thresholds, from her perspective, is that it would only take two or three big sales before she would be edging toward a $100,000 ceiling.

Rast lives and works in Montana but tries to market goods to customers in every state. As her business has grown she has moved products to Amazon-owned warehouses in 14 other states where Amazon ships them out.

The practice allows large e-commerce giants to control quality and make sure orders are filled in a timely manner, and it lets Rast sell products in higher volumes. But it also means retailers like Rast, even under the old laws, had to pay sales tax when buyers resided in those 14 states where she stored goods. The U.S. Supreme Court set that status quo in a 1992 decision, Quill Corporation v. North Dakota.

“If you have nexus in another state you are legally required to require sales tax from that state,” Rast said.

Rast said she recently outsourced her accounting to help ease the burden of making sure she made all the proper tax payments. She said without a small business exemption, the new ruling could cause that accounting work to balloon to include all 45 states that require sales tax — which could stymie the growth of her business. She said it also subjects her business to audits from all those states, which are cumbersome and expensive.

For now, Rast said she is eagerly waiting to see whether a small business exemption is written into proposals before Congress. She’ll continue to support such a measure, she said.

Since the Supreme Court ruling, other states, including North Dakota, have passed similar laws that should help them begin to cash in on online sales tax revenues in their state. In a tweet, President Trump cast his support for the court ruling as well.

“Big Supreme Court win on internet sales tax – about time!” Trump wrote. “Big victory for fairness and for our country. Great victory for consumers and retailers.”

Shares in Amazon fell 1.1 percent in the day following the decision.

Reporter Peregrine Frissell can be reached at (406) 758-4438 or pfrissell@dailyinterlake.com.