The Internet Sales Tax Spells Danger for Small Business Owners
The American entrepreneur is overburdened more so than at any other point in our history. Before even one cent can be earned, an individual with a great idea has to jump through an obstacle course of hoops and regulatory red tape. And while some may think that these standards are surely reasonable and perhaps even essential to protecting the consumer, most of these burdens have nothing to do with safety and everything to do with control. Any doubt of this can be cured by the mere fact that in many states, casket makers cannot sell, or even construct, a coffin until they have first obtained a license.
And yet, many advocates of these types of business restrictions assert that things could be worse, after all the United States is the freest country in the entire world. But when looked at in terms of economic freedom, this is simply not the case. In fact, according to the Heritage Foundation’s 2018 Index of Economic Freedom, America is not number one. The U.S. isn’t even in the top ten. Instead, the country founded on entrepreneurial freedom sits at number 18, right in between the Netherlands and Lithuania.
In addition to other qualifiers, the rankings are partially based on the size of the government in each of these countries, this includes the tax burdens each places on small business owners. Considering this, it is a good thing this economic freedom index came out prior to the Supreme Court’s recent ruling in the case of South Dakota v. Wayfair, Inc. just a few weeks ago. Had the new ruling been considered on the 2018 Index of Economic Freedom, the U.S. may have found itself further down on the list.
Internet Sales Tax and Small Business Owners
In a 5-4 decision, the Supreme Court dealt a blow to small business owners all around the country just a few weeks ago. Prior to the South Dakota v. Wayfair, Inc. ruling, states were prohibited from collecting taxes from companies that did not have a physical location therein. This new ruling overturns the 1992 case of Quill Corp. v. North Dakota, which, in the earlier days of the internet, had protected online retailers without physical brick and mortar establishments. But all this has changed now.
The new ruling states that even if a business has no physical location, inventory, or employees in a given state, that state can still collect taxes if a company does over $100,000 in sales, or at least 200 transactions. So what does this mean for smaller business owners? In reality, this means having to understand and comply with the sales tax laws in more than 10,000 different jurisdictions. While this number seems daunting on its own, this doesn’t even account for the fact that each of these jurisdictions has their own unique tax rates, different legal definitions dictating product specifications, and different laws specifying tax exemptions.
Highlighting how truly daunting it is to keep up with all the different jurisdictions’ laws, a local Kansas City outlet reports:
“▪ New Jersey knitters pay sales tax on yarn purchased for art projects, but not on yarn earmarked for sweaters.
▪ Texas taxes sales of plain deodorant at 6.25 percent, but imposes no tax on deodorant with antiperspirant.
▪ Illinois categorizes Twix as food but Snickers as candy, because Twix has flour and Snickers does not.”
This places a large burden on businesses because complying with all the different laws of various jurisdictions means having to understand each one. This means having to spend a large portion of their budgets hiring accountants and attorneys just to understand the new requirements— a costly burden to place on companies that are already having to pay to maintain their businesses licenses and other arbitrary state requirements.
Even before the ruling was made, small business owners were concerned.
“It’s just not fair for the heavy burdens that it places on small businesses like us to have to reach out to 9,600 different jurisdictions to file tax. It would really be devastating,” Michael Swoape, the owner of One4Silver told CNSNews.com.
To make matters worse, this gives an unfair advantage to bigger companies. Businesses like Amazon can afford to pay to comply with all these new tax requirements, giving them an unfair advantage. And while we all love Amazon, if it were truly as great a company as we all assume it is, its quality would speak for itself. Yet, even Amazon, who has been targeted by other government policies, has supported this expansion of the internet sales tax because they know it will benefit them. Its competitors simply cannot afford to comply.
How did we get here? Small businesses are the backbone of our American economy. But instead of rewarding these companies, or even helping to ease their financial burdens, the Supreme Court has sought to make it even harder to earn a living and create value.
But this doesn’t just hurt businesses owners; consumers will also be impacted. These companies are going to have to either choose to close up shop or find a way to meet the new financial requirements being asked of them. For many, this will mean passing some of this cost to the consumer, which means prices on online goods are bound to go up.
But not all is lost, Congress could help pass laws that ease some of these regulatory burdens.
Jonathan Johnson, who sits on the board of Overstock.com said:
“To lessen the potential impact of today’s ruling on internet innovation Congress can, and should, pass sound legislation allowing states to accomplish their aims while still permitting small internet business to thrive.”
That being said, Justice Kennedy disagreed with the sentiment expressed by Johnson. As CNN reports:
“Justice Kennedy said it was ‘inconsistent’ for the Supreme Court to ask Congress to ‘address a false constitutional premise of this Court’s own creation.’
It is a sad state of affairs when our government has developed a habit of finding every possible way to take money from profitable individuals. To truly honor the individual’s contributions to the economy, our government should be making it easier to conduct business instead of placing more burdens on entrepreneurs. If we want to get a higher ranking on next year’s Economic Freedom Index, those in power would be wise to remember the role the entrepreneur plays in society.