State Policy Update: Startups need a solution for post-Wayfair sales tax administration
By Nathan Lindfors, Policy Manager, Engine Advocacy & Foundation
In a series of State Policy Updates, we are exploring how state initiatives are impacting the innovation happening in startup ecosystems across the country. While much of Engine’s work centers on policy advocacy and education in the federal landscape, state-based policymakers impact startup formation and growth through their own work. We’re tracking what’s working for startups, what’s falling short, and what federal policymakers can learn from their state-level counterparts.
As lawmakers turn back to a long-running conversation about a patchwork of state sales tax frameworks, startups need reprieve from high compliance costs and a permanent solution to help them succeed. Today, the Senate Finance Committee is holding a hearing “Examining the Impact of South Dakota v. Wayfair on Small Businesses and Remote Sales.” Since 2018, particularly following the Supreme Court’s decision in South Dakota v. Wayfair, sales tax administration has become an increased and expensive burden for startups. The court ruling made startups and other ecommerce businesses responsible for collecting and remitting sales taxes anywhere they do business within the U.S. — possibly more than 10,000 taxing jurisdictions — whereas before they were responsible only where they had employees or a physical presence. As predicted by Engine and others shortly after the decision, startups and small businesses have been forced to change their business models, be responsive to tax authorities in far away places, and shoulder increased costs and demands for their time.
Even startups with savvy, experienced founders that seek to build in measures designed to streamline sales tax compliance from the beginning encounter impractically high costs, administrative issues, and distracting burdens. Geralyn Breig, a retail executive, member of corporate boards for several public and private companies, and the founder and CEO of the startup AnytownUSA.com walked us through these issues.
Starting out in early 2018, Geralyn knew that the Wayfair decision was coming and held off on launching AnytownUSA — an ecommerce marketplace that exclusively sold American-made products — for a few months, fearful of having to rework her whole website platform. Despite her foresight, compliance with the new regime was expensive and distracting.
Geralyn raised $700,000 in funding to start AnytownUSA, but compliance costs quickly ate into those resources meant to launch and grow the business. She had to register in 44 states just to pay and remit tax — costing thousands of dollars. Software to help collect sales tax cost $2,500 per month (her startups’ comparable software needs before Wayfair cost just $300 a month). The launch was delayed several months in order to integrate the new software and added an additional initial $25,000 to the site development costs (as well as required ongoing costs of thousands of dollars to keep the site current with the software upgrades). Other significant additional costs included adding a third-party supplier hired to automate the calculation and distribution of taxes on each purchase, as well as various legal fees as a result of quirks of the registration system in some states. These costs did “nothing productive for the business,” Geralyn adds, “except for keeping us in compliance.”
Once she was in the system for each of the registered states, Geralyn started getting an avalanche of requests from various states about other compliance issues that didn’t apply to her — like worker’s compensation plans for states where she didn’t have employees. The requests came with the threats of fines and could take days to resolve, distracting her from activities core to running and growing her startup. And the sales taxes she was responsible for remitting to the states were always of de minimis value — such that it cost her more to comply and remit the taxes than the value of the actual tax paid.
In the end, Geralyn decided to wind down AnytownUSA in 2020 for reasons unrelated to sales tax compliance (and adds that it cost her thousands just to unregister in the states), but she stresses that compliance “is a barrier that could be a deterrent” for others looking to start companies. For startup founders, she warns sales tax compliance is something “that will eat into your seed funding” and force you to reallocate limited resources because “every dollar spent on tax administration is a dollar you can’t spend on growth and other critical things for your business.” Some startup founders “probably hope to fly under the radar,” she estimates, but that isn’t a comprehensive, equitable, or long-term solution. Instead, Geralyn suggests a federal law that exempts small companies with revenue below a certain amount from paying and remitting state and local sales taxes where they have no physical presence. She believes this would enable more competition in ecommerce.
Startups should be encouraged that policymakers are returning to the issue of sales tax administration by holding a hearing to learn from impacted businesses and industry experts. Online sales have only increased since the onset of the pandemic, meaning that some startups may have been burdened or excluded from this period of growth because of compliance barriers, and lending to the urgency of enacting a solution. Policymakers must translate what they learn into a legislative solution that will reduce the burdens of state-by-state patchwork sales tax compliance and help bolster startup growth and success.
Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.