Handed down in 2018, the South Dakota v. Wayfair decision allowed states to require remote sellers to collect and remit sales tax. The result? Small businesses now have to deal with different sales tax laws in 45 states and the District of Columbia-causing confusion, frustration, and negative financial consequences for ecommerce businesses nationwide.
In the less than three years since that ruling, Brad Scott, Director of Finance for Halstead Bead, says his company has spent almost $263,000 and 6,600 business hours understanding and complying with sales tax laws. He spoke to Webgility about his advocacy efforts, explained why there is no “magic bullet” for solving the sales tax dilemma, and offered advice for struggling retailers of all sizes.
Kelley Wyant, Webgility: Alright, tax season is here. It’s not most people’s favorite time of the year, and it’s a particularly challenging time for ecommerce sellers. But wait a second, a little birdie told me that you think the term “tax season” is really a total misnomer for ecommerce sellers, because online retailers have to deal with incredibly complex sales tax legislation all year long. Can you tell me a little bit about that?
Brad Scott, Halstead Bead: Yeah. Before the Wayfair decision, which we’re going to be discussing later today, tax season for [my company] Halstead Bead was June 30th. We are on the fiscal calendar, so July 1st to June 30th. And then basically the entire month of July, I would collect all the information, put it in order, and submit it to our CPA for final review, at which point in time, we would file with the Feds and with the state of Arizona. However, now we reply or report to 20 states across the country as well as Arizona for sales tax purposes. And in some instances, we also report for gross receipts, franchise, or income tax. And with each of those different areas of tax, we have different seasons. So, sales tax is an ongoing thing. Each month, I’ve got to file with five of our states. We use an outside associate to help us file with 14 of the states. And then there’s another state that we file with quarterly. Actually, we file with two states quarterly, but one we have to pay every month, so it’s an ongoing thing.
With sales tax, the states want their money as quickly as possible. And in fact, Massachusetts is caught constantly floating the idea of real-time remittance, which would make it not even a monthly reporting requirement, but would almost make it a daily-or if the rumors are told-an immediate requirement. So, if you think about tax season, you’re doing yourself a big disservice because tax season is no longer just the beginning of the year. It’s every month, it’s quarterly. And really, if you’re familiar with running payroll, you know that you’ve got quarterly payroll reports that you’ve got to submit. Some states it’s quarterly with sales tax as well. And like I said, with most states, it’s monthly. So, if you’re only doing it on a monthly basis, you’re missing something, or you’re not getting the full credit for the amount of work required for it.
Webgility: So, let’s back it up a little bit. I know you mentioned the Wayfair decision. For those who are new to the world of ecommerce or are really expanding their ecommerce strategy to a multichannel or omnichannel strategy, can you give us a brief history lesson on the major forces impacting ecommerce sales tax legislation, and what it’s meant for sellers of all sizes?
Scott: South Dakota v. Wayfair was a court case that was decades in the making. In fact, in 1992, North Dakota tried a similar effort against a company called Quill Corporation. And at the time, in 1992, the Supreme Court looked to Congress and said this is something that Congress needs to address. It’s within their purview. We’re not going to rule on it. And for decades afterwards, states like South Dakota and others were trying to figure out the right court case, the right defendant, and the right way to overcome that Quill decision.
In Wayfair, they found a $6.8 billion company that doesn’t make a very sympathetic defendant. And South Dakota was able to get the decision that they wanted. Now, Supreme Court Justice Kennedy invited this case before it was brought forward. And he said based on what he had learned over the years that there was, in fact, less of an obstacle for businesses to comply with this. Therefore, South Dakota leapt at the opportunity and took that case to the Supreme Court.
We [at Halstead Bead] were fortunate as a small business to be paying attention to that case as it worked its way through the system. As a result, we were ready to comply immediately. But some key facts that you have to understand with the South Dakota decision is that prior to the Wayfair decision in June 2018, a company had to have a physical presence within the state to be obligated to collect sales taxes for that state’s Department of Revenue. Now, physical presence is established either through having inventory, property, or employees within the state. And if you don’t meet that set of standards, then you, prior to Wayfair, didn’t have a sales tax obligation.
The standard now is no longer a physical presence standard, it’s what’s called an economic nexus threshold. And that threshold can be met in one or two different ways. Most states use an economic nexus, a dollar threshold. If you exceed a certain dollar amount of sales into a state, and you have surpassed that threshold, by extension you are now obligated to collect sales tax. Some states still have a physical count threshold. In South Dakota’s case, it was 200 transactions. So, as a small business like ours, if we sell either $100,000 of goods into the state of South Dakota over a year, or we send 200 different packages to South Dakota over a year, then we have met those thresholds. And by extension, we are obligated to collect sales tax.
Now, those thresholds vary by state. So, South Dakota’s threshold is $100,000. California is $500,000, Kansas is $1. Those transaction counts-a lot of states don’t use them. Some do. The normal standard number is 200. But again, going back to Kansas, for argument’s sake, it’s one. So, if you make a single transaction or a single sale in Kansas, you are, according to the Kansas Attorney General’s office, obligated to be a sales tax collection arm for them.
So, basically what has happened is, whereas prior to the Wayfair case, if you didn’t have any physical presence in the state, you didn’t have to worry about that state. Now, you do. You’ve got to worry about a lot of states, and those states’ thresholds are measured over different periods, their definitions are different, and it’s really caused us a lot of consternation. But [in the ecommerce industry now], whether you’re dealing with retail, wholesale, manufacturing, distribution, whatever your sales preference is, if it’s business-to-business or business-to-customer, you’ve got to be aware of the rules and regulations for sales tax in any of the states that you’re selling to.
Webgility: You mentioned that Wayfair was the perfect target. People were not feeling that sorry for them. But you’re the Director of Finance for a family-owned ecommerce business in the wholesale jewelry materials industry. I know just from having chatted with you before that you felt the sting of dealing with the confusion of this legislation firsthand. Can you tell me a little bit about Halstead Bead’s story as it pertains to dealing with this issue?
Scott: My mother- and father-in-law started Halstead Bead in 1973. They ran it out of a car and their family room for years. And then they opened up a shop down in the Phoenix area in the 1970s. They moved that business to Prescott, Arizona, in 1982. When I first started working here, we were about $2.6 million-a-year company. And now we’re up to about $6 million a year in revenue. So, we’re a small business.
And when you compare us to Wayfair, like I said at the time of the decision, they were a $6.8 billion company. They’re significantly larger than that now. But at the time of the decision, they were 1,100 times larger than we were. Whether or not they had the resources and the tools in-house to deal with Wayfair, the decision at the time, I don’t know. But I can speak to Halstead, and the reality is we really didn’t. My wife and I had to deviate our attention. She’s the president of the company. We had to deviate all of our attention from our business for almost an entire year to get our heads fully wrapped around what exposures we had, what our obligations were, and what we had to do to move forward.
In the two years and nine months since that decision, we spent in excess of $263,000. We’ve collected $114,000. So, we’re spending $2.30 for every dollar of sales tax that we collect. We have put 6,600 hours of business time into compliance understanding. So, it’s not even working for our customers for the benefit of our business; it’s really just making sure that we are not falling afoul of rules and regulations for states across the country and the departments of revenue.
We have questioned over the last couple of years whether or not we want to stay in business. I know several businesses have actually shuttered their doors because the exposures and the liabilities that come along with failure to comply with sales tax are pretty enormous. Fortunately, we were paying attention to the case as it made its way through the court. And as a result, while I don’t think there is a business like ours that could possibly say they’re doing it 100% perfectly, I think we’re doing a pretty good job. And if we were ever to be audited, the penalties would be there, but hopefully, they wouldn’t shut us down. I could never say that for sure.
Webgility: You’ve testified before Congress about the need for simpler sales tax laws for small businesses. Can you tell our readers a little about your advocacy efforts?
Scott: My wife runs [Halstead Bead] like a much larger company. She was paying attention to the Supreme Court case, she pays attention to a lot of things that small business owners typically don’t have the bandwidth for. And when we saw what was going on, we started reaching out to local legislators. And what we learned was that none of them knew what we were talking about. They knew that Wayfair was an opportunity for the Department of Revenue in Arizona to gain additional revenue from businesses outside of the state of Arizona. But they weren’t thinking about the fact that it was negatively impacting their own constituents’ small businesses.
And so we went to our state legislature in May of 2019. I think at that time we had spent something like $68,000 on compliance, and we collected some pittance of an amount. Again, it was around $2.30 per dollar collected. And they were stunned. They said, “No, there’s rules against this.” I said, “No, there really aren’t. What you’re trying to do with businesses outside of the state of Arizona, every other state is trying to do with businesses within the state of Arizona.” And they said, “Well, there’s nothing we can do. This is a federal matter. This is interstate commerce.”
And so I reached out initially to the National Federation of Independent Businesses, the NFIB, and said, “What do you guys know about this?” And they said, “Not a whole lot.” And I reached out to the Small Business Administration’s Office of Advocacy and said, “What do you know about it?” They said, “Not a lot.” And I said, “Oh, shoot.” So, I emailed and called all of our Arizona delegates for Congress and they weren’t very familiar with it. And I started reaching out to legislators in Congress and the Senate Finance House Judiciary because those are the two committees of jurisdiction on this. And then I also reached out to a lot of small business committee members as well. And that led me to testify in front of Congress last year on this matter with another lady from a small business in Illinois. She is a fellow member of a group called the American Catalog Mailers Association. And at this point in time, the ACMA is really the only industry group that I am familiar with that is really fighting this issue. And so I’ve become very heavily engaged with their efforts to fight for uniformity and simplicity.
One thing that we’ve become acutely aware of in the last couple of years is that there is no putting this genie back in the bottle. Wayfair is here to stay. So, then the hope becomes how do we impress upon legislators, both at the federal and at the state level, that if they want their small business communities to continue to exist, to continue to thrive, and to continue to be innovative driving forces within our economy, then they need to make sure that the sales tax compliance efforts aren’t so burdensome that it becomes the sole driving factor of every decision that you make. And so that’s kind of where we stand right now.
There was a hearing last year within the House Small Business Committee, that’s the one that I testified in front of. There was supposed to be another one in front of the Senate Finance Committee, but unfortunately, COVID kind of shut everything down. And so now we are once again pushing for hearings in the Senate Finance Committee, and the House Judiciary Committee in D.C. I don’t know if we’re going to find legislative champions on The Hill or not. I do know that Senator Wyden out of Oregon is a big proponent for small business and that Oregon is a non-sales tax state. So, he’s got a different take on this than a lot of other states have. But hopefully, he is going to be putting this matter into the hearing channel before the end of the year.
Webgility: So, we’ve talked about the problem, we’ve talked about your advocacy efforts. I know from talking to you before that you’ve cobbled together your own system in terms of dealing with sales tax compliance at Halstead Bead. Is there a magic bullet here in terms of alleviating the pain of this confusing sales tax legislation for other small businesses and small ecommerce businesses? Is there technology that can help? Is it being more proactive and collaborative with your accounting professional? Is it a mix of different initiatives? What do you recommend?
Scott: There is no magic bullet. So, there were software companies that submitted amicus briefs before the Supreme Court for the Wayfair case. And they purport to be able to do this for you inexpensively or, in some cases, free of charge. What we have found is that, especially for our case, because we’re a mixed model, we do both retail and wholesale, that the solutions available are either prohibitively expensive, or they’re inadequate. So, there are a couple of large companies out there that can do this. Integrating with these solutions is quite costly. And I don’t have experience working with them, because we don’t have the resources to be able to pay for that integration. So, we went with what was marketed as the free and easy solution, it was neither. We spent about $30,000 integrating with their solution back in late 2018. And we have since left them because they weren’t doing the job in a way that they promised to do. In fact, last Monday, I received eight notifications from the state of Michigan that we had failed to pay taxes or penalties, or interest from the periods between October of 2018 and August of 2019. During that period, we were using this firm. That firm was supposed to be managing all of that for us. And in fact, they had promised on numerous occasions that everything was fine. And I’m still receiving notifications to this day that we still have problems that are outstanding.
Our local CPA is a wonderful resource for us in Arizona. But if I have questions about what I need to do in New York, he’s got to do the same level of research that I have to do. And I can pay him or I can pay myself. The same is true with our attorney here in town. This is not within his wheelhouse. So, using the regular resources that we relied upon for decades at Halstead is no longer a practical reality. We’ve had to go to outside sales tax specialty firms. We are using one right now, like I mentioned earlier, the company’s called TaxValet. And they’re a great resource for domestic purposes. But unfortunately, we are also now having to deal with that in Europe, which means that I have to find yet another specialist to help me over there. And so what it means for a company of our size-we’re 25 employees-is that we now have to outsource an enormous amount of our compliance assistance because it is just too great a burden for us to be able to do it internally.
So, then it comes down to which tax resources are the right ones. And I wish I had a really good answer for that question. I trust TaxValet. I don’t trust a lot of big ones that I’m not going to mention names for, but they’re easily found online. And so is there a magic bullet? No, there really isn’t. A lot of it comes down to taking a lot of your own time and doing your own due diligence and researching what’s out there on the different Departments of Revenue websites and then making sure that you understand how to read that legalese. Because what I found in the last couple years is that it varies from state to state. Even definitions aren’t the same across state lines. So, it becomes a matter of really making yourself an expert in yet another area that frankly, isn’t our specialty.
Webgility: For folks who are just getting started or are trying to look for more information about what their responsibilities might be, where would you tell them to go?
Scott: Well, I’ve already mentioned TaxValet. Great resource. They’re a small company, and they work with a lot of small companies. We actually found them through a small company incubator tool. There’s the Sales Tax Institute. Diane Yetter has been very heavily engaged with interstate sales taxes for a very long time. Her resources are great. And then there’s the personal research tools that we’ve used. We’ve used Bloomberg’s tax tool in the past. Law360 has a tax tool that is helpful. Currently, I use TaxNotes, which is offered by Tax Analysts. And each of those is a subscription-based resource that you can use to find out what is happening at the legislative level with each of the states.
The problem with all of those is that there are blind spots that you’re just not aware of. And what you’ll find when you talk to a lot of small businesses, when they learn about their tax requirements or their tax obligations due to the Wayfair case is that they’re finding out in the moment from either their CPA or their attorney. And it’s a quagmire of information that you have to get into. It’s very difficult to understand what your exposures are for each of those states. And so you need a company that can basically do an audit of everything that you’ve done since the Wayfair case. In some cases, it’s going to extend beyond that depending on whether or not you have a physical presence established that you may or may not be aware of. And to give you an example of that, if you are a company online and you have a Fulfillment by Amazon contract or you’re using a marketplace facilitator, frequently, they will house your inventory. And if they move your inventory with or without your knowledge into a state that uses inventory as a physical presence standard metric, then you may have a physical presence in the state that you’re not even aware of.
And so if you’re an independent operator like we are, we know that our liabilities go back to no further than July 1st of 2018. But if you are on a marketplace facilitator, and they’re controlling your inventory, your exposures may go back further than that. So, again, like I said, there’s no magic bullet, there’s not even a single resource that the federal government can recognize to help us with this. And it’s not a federal government issue. It’s because of a Supreme Court case that the states have made this an issue. And so yeah, there’s really no good answer to most of your questions, unfortunately.
Webgility: When you think about both the United States and globally, as we’re trying to climb out of this incredibly turbulent time, and you think about economic growth, a lot of the heroes of that story are small businesses. And certainly, the ecommerce industry has had a very turbulent time, with some categories experiencing exponential growth and others seeing devastating loss. For those online retailers who are looking to expand to a multichannel strategy or even omnichannel as things start to open back up again, do you have any special considerations for them?
Scott: Know your numbers. The states want to know your numbers. They want to know how many dollars of sales you’ve sent into their state, how many transactions you sent into their state. If you know your numbers, you have a better understanding of where your exposures lie. It’s a lot of research. It’s a lot of data. Fortunately, software today does allow for people to be able to gain access and entry to that information fairly easily, but you’ve got to be able to read it, and you’ve got to know where it’s going.
I would say that COVID has introduced a lot of companies’ brick-and-mortar stores, that prior to COVID probably didn’t have a whole lot of interest in getting online, but it’s given them new avenues and new resources to expand their businesses, and it’s been fantastic. The small business community is an incubator of innovation, development, and growth in this country. We employ an enormous number of the population. I think it’s something like 48% of all people work for small businesses. So, don’t shy away from taking your business over state lines. But definitely make sure that you know where you are in relation to those thresholds, whether they be financial or transaction count, and find yourself an expert that can help you.
I think the tendency is to kind of curl back into what’s comfortable and what’s known. But I think what we’ve seen throughout the last 25 years since the internet has really taken off is that that’s the quickest way to obsolescence. You’ve got to embrace that change and that new direction. Just understand that when you get into it, there are going to be new complications that arise.
There are resources out there. There’s no single magic bullet. But if you work with a company like TaxValet, and I know Webgility builds tools that help that online platform with your own back house accounting, if you can keep that visibility available for the user, then they know where their challenges lie. And for small businesses especially, that’s a big risk that you take on yourself. It’s a risk that’s worth it. But, ultimately, that risk-depending on where your exposures lie-is really a personal choice.
Webgility: Brad, thank you so much for chatting with me today. As always, great insights for sellers of all sizes and backgrounds. We’re wishing you and everyone at Halstead Bead all the best.
Scott: Thank you, Kelley. Appreciate the opportunity to talk today.
Originally published at https://www.webgility.com.
