By Wayne Schutsky Tribune Staff Writer
As the Internet continues to change the face of the retail industry throughout the country, the U.S. Supreme Court made a decision that could affect hundreds of thousands of people who sell items online.
That national debate hit close to home for Gilbert resident Theresa Cox, who has spent years building a successful small business on eBay and has been recognized by the company as a top seller.
Cox has been particularly worried about the South Dakota v. Wayfair Inc. case. In a 5-4 decision, the court sided with South Dakota, allowing states to impose retail and use taxes on online sellers from other states even if they don’t have a physical presence in that state.
Cox began selling items on eBay in 1997, two years after the company was founded and before many Gilbert residents had an Internet connection in their home.
“In 1997, it was completely different,” she said. “There was no PayPal and when you sold something, the buyer would send their (address), and you drove to the post office. It was all very manual.”
Buyer expectations also have changed.
“If you got your item in 30 days 20 years ago you were happy,” Cox said. “Now people expect everything in three to five days.”
“It’s a completely different ballgame,” she said.
Cox first started off selling red items, an homage to her love of the color, and now sells through her eBay store, ClubRed97. Selling online is now her sole source of income.
“Like most eBay sellers, you start in a niche and then expand to anything you can find and make a profit on,” she said.
She then began selling off items from her large Gilbert home in order to downsize, including a large collection of practically unused toys and games that had been in a playroom for her niece and nephew.
She now also makes money via retail arbitrage – buying items on discount at retail stores and reselling online at marked-up prices.
A previous Supreme Court decision from 1992 (Quill Corp. v. South Dakota) found that states can only force companies to collect sales tax if the business has a physical presence in that state.
The result of the Wayfair case reverses the Quill decision, meaning Cox and similar small business owners may have to navigate the complex web of sales tax regulations and jurisdictions that have cropped up since 1992. There currently are over 10,000 sales tax jurisdictions in the U.S., according to the Tax Foundation.
“The compliance costs are high because not everything is taxable the same in each state,” said John Buhl, media relations manager for the Tax Foundation. “There is a lot of complexity that gets overlooked.”
However, the Wayfair decision is limited because the court supported only South Dakota’s law, which includes some protections for sellers. It noted that more complicated state laws adopted in the future still could be struck down if the court determines they impose an undue burden on interstate commerce.
The Tax Foundation actually filed a brief in the case in which it did not support either party but did ask the court to uphold South Dakota’s law without tacitly approving more cumbersome laws.
The Wayfair decision worries Cox.
“I’m disappointed in this decision and am very concerned about the impact that it will have on small businesses like mine,” she said. “I hope that Congress will now step in to decide what constitutes a small business and hopefully they will keep in mind the stories that we were able to share while we were in D.C.”
“For many small businesses today, it’s not uncommon to have $1 million in sales and still be a small business with a limited number of employees. Congress needs to do their homework when determining the definition of a small business.”
Bills have existed in Congress since 2008 that would deal with the issue. The most recent incarnation of these never made it out of the House of Representatives, though some lawmakers considered attaching it to the recent spending bill.
That bill would have allowed states to tax out-of-state sellers without a physical presence in the state, but it also would have offered some protections for sellers like Cox.
“That bill would have protected sellers from getting audited from a bunch of different locations by requiring one point of contact in each state,” Buhl said. “For small sellers, states would have had to pay for the cost to run software for compliance and collection.”
Without included protections, state or federal laws on the topic could put an undue burden on small businesses.
“The smaller the businesses, the larger the burden,” Buhl said.
The Tax Foundation is advocating for states to simplify their standards and guidelines to make the tax process as simple as possible.
“The easier sales tax compliance is, the more it benefits all parties,” Buhl said.
Supporters of the Supreme Courts recent decision have argued that states are currently missing out on needed sales tax revenue and software now exists that would make navigating those tax regulations much easier for business owners.
Writing on behalf of the majority, Justice Anthony Kennedy stated that South Dakota’s law is acceptable because it includes protections for companies that do only limited business in the state and does not allow for retroactive application of the sales tax. Kennedy also wrote that South Dakota has a Streamlined Sales and Use Tax Agreement that reduces administrative and compliance costs for sellers.
Third-party marketplaces like Amazon or eBay also could provide solutions for sellers.
While that is true, Buhl pointed out that those resources will not come cheap for small businesses.
“Solutions are out there, and no one will be left out completely,” he said. “They will just be more reliant on the small group of software that is out there and have to pay a fee that would affect their bottom line.”
Cox echoed those sentiments.
What started as a hobby slowly grew over time until Cox decided to quit her finance job at Arizona State University over two years ago to begin selling full time. While she has created a thriving business in that time, the prospect of changing tax regulations has intimidated Cox due to – and not in spite of – her background in finance.
“The (potential) online sales tax legislation is something that scared me because my background is in operations and finance,” Cox said.
Cox said that when she worked in the University of California system she had to participate in sales tax audits, but she had a staff and expensive software to help at the time.
For small businesses that cannot afford those resources, the burden of navigating hundreds of different tax regulations could prove fatal.
“When I looked at the legislation, I saw that it would put a lot of small businesses out of business,” Cox said.
The issue is so important to Cox that she traveled to Washington, D.C. in May to meet with lawmakers and advocate on behalf of small businesses that operate via online platforms like eBay.
In Arizona, Cox runs a group on meetup.com called EVIES, or East Valley Innovative eBay Sellers. The group meets up twice a month to offer advice and discuss topics related to improving members’ businesses. The group has around 80 members and meetings typically have up to 40 people in attendance.
The group is also planning to meet with Reps. Andy Biggs (R-5) and Kyrsten Synema (D-9) to discuss the issues facing online sellers.