Following the Supreme Court’s June 21, 2018, decision in South Dakota v. Wayfair, state governments gained the authority to impose sales taxes on remote sales originating outside of their boundaries.  One of the warnings given prior to this decision is that it would lead to a confusing and burdensome patchwork of taxing requirements for many businesses to navigate, particularly small businesses.  In a November 14, 2022, report, the Government Accountability Office (GAO) found that this was in fact the result of the case, and suggested that Congress should resolve these issues by establishing a uniform national standard for remote sales taxation. 

There are 45 states with a statewide sales tax, 38 of which also have local sales taxes.  This means there are an estimated 10,000 to 12,000 local jurisdictions that have “potentially different taxing authorities, rates, bases, and rules.”  Business owners must determine how to comply with the tax rates, income thresholds, and reporting requirements of each state and local jurisdiction in which they sell goods and services, many of which are unlikely to be the same.

For example, 22 states and Washington, D.C. have a tax threshold of $100,000 in sales or 200 transactions within a single year.  California, New York, and Texas, three of the four largest states by population, have a tax threshold of $500,000 in sales within a single year.  Making this even more complex, businesses must deduce which twelve-month period the state laws cover, as not all use a calendar year for reporting requirements.

Increased reporting requirements have hit small businesses the hardest.  The GAO report noted small businesses are more reliant than larger ones on software developed to help them comply with different requirements in each state or locality.  Even after purchasing software, however, many small businesses still had difficulty reaching full compliance because some software does not provide enough detailed information to comply with smaller taxing entities’ requirements, which means the businesses need to spend more money on compliance and less time selling their goods and services.

The report makes several recommendations, including the adoption of legislation by Congress that would direct states to enter into “an interstate collaborative mechanism through which states agree on uniform standards and centralized processes,” similar to the Streamlined Sales and Use Tax Agreement (SSUTA).  Under SSUTA, member states “must have state-level administration of state and local sales taxes, uniformity across state and local tax bases… and databases for businesses to identify local rates and boundaries.”  Of the 38 states that allow for local sales taxes, 20 are SSUTA members.

GAO also proposes the establishment of uniform definitions, thresholds, programs, and processes.  Barring an agreement among the states or federal legislation to create a single standard, GAO recommends that individual states take steps to simplify their tax rates and processes.  States could offer free software to business owners to help them meet the requirements.  

Complex and varying sales tax reporting requirements and thresholds make it difficult, if not impossible, for small business owners to serve their customers and remain in business. To mitigate the disarray and harm caused by the Wayfair decision, Congress and the states should work together to create a uniform system for sales taxation.