There is a
tax case coming before the Supreme Court. It involves Wayfair, the online home goods
company, and sales taxes.
The issue
can be summarized as follows: if I do not have a building or inventory or
employees in your state, can you force me to collect your taxes?
The Wayfair
case is an evolution of the Quill case,
decided by the Supreme Court in 1992. Quill is an office-supply company, and in
1992 the issue was whether North Dakota could tax Quill just because it sent
catalogues to residents of the state.
North Dakota
was adamant: Quill was regularly and systematically soliciting its citizenry.
It did not care that Quill had no presence in the state. By that reasoning
Norway could have also taxed Quill, but let’s not introduce common sense into
this argument.
The Supreme
Court was unwilling to go that far, recognizing that sales taxation was (and
is) the wild west of taxation. Each state has its own rules and - depending
upon the state - there can also be counties and cities imposing sales tax.
What has
changed since Quill? The internet, of course.
The new
argument is that the internet has revolutionized how business is done.
But sales
taxes are still eccentric, often cryptic and frustratingly inconsistent. The
internet has not revolutionized that. Perhaps Amazon can wield the accounting
staff necessary to comply, but a small business may have a different result.
I have a client
that got mugged by the “tattletale” statutes that some states are now implementing.
Let’s look
at Washington’s tattletale law.
It applies if
you do not otherwise collect Washington sales tax.
Let’s say
that you sell promotional materials for old-time movies. You have a modest warehouse
in a nondescript part of town, You sell exclusively over the internet, and you get
paid almost exclusively through PayPal.
You have a
sale in Washington state. Then two, four, ten…. You get the idea.
Washington
is watching you.
Get to
$10,000 in Washington sales and you have issues.
Oh, they
cannot force you to collect sales taxes, but they can force you to:
(1) Conspicuously post on your website
that sales taxes are due and that the purchaser must file a use tax return.
Fail to do so
and there is an immediate penalty of $20,000.
Ouch.
Are we done?
Of course
not.
Let’s say
that you actually sell something.
(2) You must provide a notice with every
sale that no sales tax is being collected, that the purchaser should file a use
tax, and instructions on how to pay the use tax. The notice must be “prominently”
displayed.
You write a
standard notice and keep copies.
Are we done?
(3) At year end you must send the
purchaser a list of everything they bought, by date. You again must provide the
usual gospel on use tax and how to get information on its filing.
This
starting to get expensive. Who has time for this nonsense?
Make time.
The penalties begin at $5,000 and can increase exponentially.
(4) You must send a copy of that list to
the state of Washington.
Fail to do
so and penalties begin at $20,000.
By my math,
if you sell $10,001 into Washington and do not become an unpaid agent of
the Department of Revenue, you are exposed to $45,000 in penalties.
Washington
of course says that it can waive penalties.
Fairy tales used to be for children.
And the
fairy tale is a one-off only. There is no second chance at a waiver.
Mind you,
Washington’s state sales tax rate is 6.5%. Go to Seattle and you pick up a
city sales tax, making the combined rate 9.6%
What pathological
bureaucrat sets the bar at $650 in sales tax?
This is the
standard structure of the tattletale laws: resistance is futile.
In ancient
times – say the 1980s – there was a concept in state taxation called the
Commerce Clause. This refers to the Constitution and its restriction on states to
not so burden and fetter their laws so as to interfere with interstate
commerce.
Seems to me
that the Supreme Court should consider the Commerce Clause implications of a
$45,000 penalty on $10,001 in sales when considering the Wayfair decision.
I know.
Fairy tales used
to be for children.
