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GAO Report: In Wake of ‘Wayfair,’ Differing State Requirements for Sales Tax Collection Present Challenges for Businesses

Ruth Singleton
Published Date:
Jun 15, 2022


A report issued Tuesday by the Government Accountability Office (GAO) found that after the 2018 Supreme Court decision in South Dakota v. Wayfair, enabling states to require out-of-state businesses to collect sales taxes even in the absence of a physical presence in the state, the 45 states that collect sales tax adopted requirements for remote sales tax collection that differ by economic thresholds, registration requirements and other factors. These differing tax collection requirements present challenges and costs for businesses.

Most of the report consisted of the testimony of James R. McTigue Jr., the GAO’s director of tax policy and administration, at a hearing before the Senate Committee on Finance held on Tuesday. For the 2021 reporting period, 33 of the 45 states that collect sales tax reported a total of around $23.1 billion in revenue collections from out-of-state businesses (commonly referred to as remote sellers). That represented an increase from the $16.3 billion in sales tax revenue from 31 states in 2020. Twenty states provided data on the portion of their sales tax revenue attributable to marketplace sales, totaling around $9.5 billion (approximately 41 percent of total collections from remote sales reported during that period). 

The GAO summarized its findings, reporting that “remote sales tax laws mean that many more businesses are subject to multistate taxation for remote sales. … Multistate tax collection has always come with challenges and costs for businesses. Prior to the internet, businesses were typically taxed in new states as they grew and expanded their physical presence, and often, their sales. Today, even a small online seller could have a customer in every state. With every sale, a seller has to determine whether nexus, physical or economic, has been met, and potentially collect and remit tax. Businesses have faced various costs to come into compliance with remote sales tax laws that were adopted or came into effect following Wayfair.” 

According to Accounting Today, at the hearing on Tuesday, Senate Finance Committee Chairman Ron Wyden (D-Ore.) expressed concern about the impact of Wayfair on small businesses. He said, “In the Wayfair decision, as it’s known, the Court gave states a green light to force small businesses into becoming tax collectors when they sell online—collecting taxes even for states where those businesses had no brick-and-mortar presence.” 

Wyden remarked on the complexity of these differing sales taxes laws, providing some examples: “In Illinois, you’ll pay sales tax on a Twix bar, but not on a Snickers. If you take up sewing in New Jersey you’re in for some confusion. Yarn bought for art projects will get taxed, but yarn for sweaters—that’s tax free. After the Wayfair decision, small businesses are on the hook for managing that complex web of laws. They’re essentially forced into buying costly software and hiring consultants to get it all straight.”  

Wyden has urged Congress to pass a bill,  the Online Sales Simplicity and Small Business Relief Act, that would exempt small businesses that have revenues under a certain threshold from the impact of Wayfair. 

Sen. Mike Crapo (R-Idaho) the ranking Republican on the committee, agreed that small businesses face a burdensome and complex system that makes compliance difficult. “This compliance can be time-consuming and expensive, especially for small businesses and for merchants in states that do not levy sales taxes, but that must collect and remit sales tax to other jurisdictions,” he said. “ A sales tax system with more consistent thresholds and standards would allow businesses to more efficiently comply, and provide tax certainty, reducing the risk of future audits and penalties.” 

Accounting Today also reported that some states with strong tax revenue are reducing specific sales taxes, such as on gas, in response to soaring inflation. Yet these gas tax reductions don’t appear to have led to any reductions in gas prices paid by consumers. In addition, some states, such as Alabama, Kansas, Oklahoma and Tennessee, are offering consumers sales tax exemptions for groceries. 

Some states, such as Florida, are offering tax holidays during certain times of the year. During the first week of July, Florida is offering a “Freedom Week” sales tax holiday on a wide array of recreation goods, as well as on admission charges to music, sporting and cultural events; movies; museums; state parks; and fitness facilities. 

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