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Interview by Ryan Prete
The U.S. Supreme Court is likely to rule in just a matter of weeks on an online sales tax case that could change the way America shops online. And the way states tax online sales. And the numerous compliance hurdles that online retailers face.
The case is South Dakota v. Wayfair, a long-awaited direct challenge to the 1992 decision in Quill Corp. v. North Dakota.Quill, which states for years have tried to “kill” through lawsuits and legislation, prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence. The case was argued April 17, and practitioners expect a decision by late June.
At the center of the issue is the question of how businesses will react to a potential reversal of Quill. The cost of complying with potential new rules for remote sellers is hard to estimate, especially for small and medium-sized businesses. it’s an issue that obviously bedeviled justices during the oral arguments in April.
Bloomberg Tax’s Ryan Prete sat down with Scott Peterson, vice president of U.S. Tax Policy and Government Relations for Avalara Inc.—a tax compliance software company—ahead of its CRUSH Conference in Washington, D.C. The conference, which runs from May 9-11, promises three days of discussion focused on “the future of compliance.”
Bloomberg Tax: What should be the main priority for noncollecting sellers between now and a decision in Wayfair?
Scott Peterson: This is an easy answer. You need to first think about what you’re selling and who you’re selling to, because you can’t really forecast whether or not some state is going to be successful in changing its rules. You need to be able to sort your customers by the state that you’re selling into. You need to put a dollar value and account for your number of transactions. Then you need to call your attorney, and call your CPA, and ask them to help you understand what these laws are, because there are a bunch of them. But automation isn’t the answer for everybody.
Bloomberg Tax: Should noncollecting sellers hold off on collecting and remitting until a decision is reached?
Peterson: People should always be following the laws that apply to them, but you need to plan. This is a rare time where people can almost look into the future and get a sense of what a new law might look like.
Bloomberg Tax: Would it be a risky business model for sellers who are already collecting to stop while the U.S. Supreme Court weighs a decision?
Peterson: It’s not just risky, it’s a big mistake. To legally pause collecting, you actually have to un-register with a state and actually get some sort of acknowledgment from the state that you’re done. In this world, there is no such thing as a pause—there’s only a get in or get out.
Un-collecting would be very time consuming. You’d have to file that final return, and when you do that, a state will think you went out of business. So if you stop collecting and then South Dakota wins, and you start collecting again in August, and a state doesn’t see returns for June, you’re going to have a problem. That’s risky business.
Bloomberg Tax: What did you think about Justice Stephen Breyer’s plea for further information on compliance costs?
Peterson: When I listened to Justice Breyer, what I heard him say was “Someone give me the answer. You’re asking me to change the whole world, and you’re not telling me what it’s going to mean.” I don’t think he really cares what the compliance cost is, as much as he would like to be informed of the effect that his vote might have.
Bloomberg Tax: Breyer also asked about the compliance costs for an e-commerce giant. Do you think Amazon.com Inc’s. compliance costs will ever be known?
Peterson: I doubt Amazon’s compliance costs will ever be known. The deal with a big company is that their tax department does many things. There’s also property taxes. The process of valuing a 10,000 sq. ft. warehouse with conveyor belts, robots, and a cafeteria is extremely complicated. If you’re the bookkeeper for a small business, one of the things you have to deal with is property taxes and business licenses. Even Amazon has to have a businesses license wherever they are. Anyways, there are so many things that make a big companies tax department radically different than a small or medium-sized company’s tax department. It’s just really hard to say what that overall figure could be.
Bloomberg Tax: How are compliance costs gauged for sellers using Avalara? Does it depend on volume of transactions made?
Peterson: Pricing is based off volume and products. There’s a lot of things that go into tax compliance. So if you’re someone who wants to just calculate what sales tax they should charge, and run their sales through AvaTax, that’s a completely volume-driven thing, and you buy them in buckets, by “X” number of transactions in a year. Our prices start for as low as 50 transactions a year. If you want us to file returns for you, there’s an extra fee for that.
Bloomberg Tax: How are Avalara and other tax compliance software compliance companies gearing up for a potential Quill reversal?
Peterson: For us, frankly, the thing that we think about the most when we think about how we’re preparing is the registration process. There’s so much of this that is a “Who the heck knows how it’s going to play out” type thing, that it’s hard to really understand, because it’s the flow that makes all the difference. We get new customers every day, and we get them registered where they need to be registered.
That’s an every day thing for us. But what isn’t an every day thing for everybody is having 10,000 people call up and say “I’ve got to start collecting tomorrow.” So its getting the people registered, because you can’t do anything if you aren’t registered. You have to have a license in every state where you’re going to collect, and that’s the thing that has got people wondering how this is all going to play out.
The Streamlined Sales Tax Initiative has a registration system, so we can register a customer in 24 states in five minutes. It’s simple. It’s painfully simple, wonderfully simple. But, legally, you can’t collect unless you register. But when will this begin? So if the court says, “You win this case, South Dakota,” when would the new law start? And at [the Streamlined Sales Tax Governing Board Inc. meeting] last week, there were a number of tax commissioners that were asked this question, and every one of them said “well, it depends on what the court says, but we know we have to be reasonable.” I mean, if they rule on June 30, July 1 can’t be the first day of collections.
Bloomberg Tax: What would a complete reversal of Quill with no established threshold or guidance look like for sellers? Would this be a chaotic time for Avalara?
Peterson: From our perspective, there would be no chaos—it would be the same way regardless. Even if the Court just follows what the South Dakota law says, and do it exactly like that, or whether they do anything else, the result for us is going to be the same. We’re going to have people calling us and asking for help. I don’t think chaos is a concept that affects our business at all. The deal with our business is that registration is a one-time thing. When you want to start collecting with us, and I’m sure it’s like this for other companies, you’ll see a list of states with a “radio” button besides each state. Once you activate a state’s button, you’re now collecting in that state. Its just click, click, click.
Bloomberg Tax: What are the biggest compliance costs that sellers face associated with the software?
Peterson: Really, there are only two components to price: the cost of the transaction and the filing of the return.
Bloomberg Tax: South Dakota’s digital sales tax statute, S.B. 106, which would mandate sales tax collection from retailers with annual in-state sales exceeding $100,000 or 200 separate in-state transactions, is the law in question in South Dakota v. Wayfair. Does Avalara have a lot of users who complete under 200 transactions a year into a single state?
Peterson: That’s a very good question, and we must. We’ve had small sellers selling into Wyoming that have collected as little as 12 cents in sales tax in 2017, so that would have to mean less than 200 transactions in a year. My guess is that collection represented only one sale.
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