The 2018 Supreme Court case South Dakota v. Wayfair changed the way that states collect sales tax on out-of-state transactions. A new standard was put in place that required out-of-state businesses to collect and remit state sales tax if they have sufficient sales or transactions within a state. In the wake of the decision, many states have adopted similar tax regimes. The Buckeye Institute and the National Taxpayers Union Foundation today published an analysis of these policies. The new policy paper lays out strategies for post-Wayfair policies that will not place undue burdens on entrepreneurs and small businesses.
“In its South Dakota v. Wayfair decision, the U.S. Supreme Court opened the door for states to revise how they collect sales taxes on out-of-state retailers. Unfortunately, Ohio simply adopted South Dakota’s model to comply with the court’s ruling,” said Rea S. Hederman Jr., executive director of the Economic Research Center and vice president of policy at The Buckeye Institute. “But South Dakota’s policy does not offer a one-size-fits-all approach and Ohio should revisit its e-commerce tax policy to ensure it does not unfairly hinder small businesses or stall economic growth.”
Ohio’s population and economy are at least 12 times larger than South Dakota’s, so it makes little sense to apply identical thresholds. NTUF and The Buckeye Institute suggest an alternative that makes more sense for the size and scale of Ohio’s population and economy.
In the policy paper, policy analysts from NTUF and The Buckeye Institute write,
First, Ohio should raise the sales and use nexus threshold to at least a more reasonable $500,000 sales threshold—the same as Ohio’s [Capital Acquisitions Tax (CAT)] threshold. This will exempt smaller firms and entrepreneurs from some administrative burdens. A better policy would eliminate the CAT altogether, but aligning the CAT and the Wayfair nexus sales thresholds will at least reduce complexity and confusion for businesses. Second, Ohio should make the nexus threshold requirement both a specific sales amount and a total number of transactions. This will help ensure that small businesses continue to sell to Ohio residents without additional administrative expenses. Third, the nexus sales threshold should apply only to taxable sales, and not wholesale transactions or sales of non-taxable items. This will help protect businesses that might exceed a threshold in gross sales but not in taxable sales. Finally, Ohio should ensure that small, out-of-state sellers that do not meet Ohio’s nexus sales thresholds are also exempt from the state’s administrative sales reporting requirements. Regulatory burdens discourage start-ups and entrepreneurs. No new reporting regulations should be placed on smaller companies that do not meet nexus requirements.
Additionally, complex tax codes discourage businesses and entrepreneurship. Complying with them requires significant investment of time and resources. States like Ohio should simplify their tax regimes to ease compliance burdens as well to make it easier for out-of-state companies to know how much tax to collect and remit.
"Small businesses and entrepreneurs have unfortunately suffered under Ohio's low de minimis threshold requiring out-of-state firms to pay remote sales taxes," says Andrew Moylan, NTUF Executive Vice President. "Instead of adopting South Dakota’s low threshold for out-of-state tax collection and reporting, Ohio should raise these thresholds, simplify compliance requirements, and limit the nexus of its commercial activities tax. Increases in online shopping during the pandemic have illustrated the vital importance of ensuring tax policies are fair to small operations that need the internet to compete. Our analysis with The Buckeye Institute clearly demonstrates the need for Ohio to update its tax laws to make its system friendly for taxpayers and businesses everywhere."
The COVID-19 pandemic has underscored the need to get e-commerce sales tax policy right. With the abundance of e-commerce transactions taking place, policymakers must plan their tax policies carefully to avoid causing undue harm to businesses and taxpayers. South Dakota’s tax model is not a one-size-fits-all solution, and states that adopt similar policies should adjust them to make sense for their populations and economies.
If you would like to discuss out-of-state taxation with NTUF Executive Vice President Andrew Moylan or NTUF Policy Analyst Andrew Wilford, please contact Kevin Glass, NTUF Vice President of Communications, at 703-299-8670 or at kglass@ntu.org.