Brad and Hilary Scott run a family jewelry business. They sell jewelry across state lines—and that’s become a huge liability. A recent Supreme Court says they, and other businesses, have to pay sales taxes to other states, which could potentially ruin small businesses like theirs. Daniel Davis recently spoke to them at the annual meeting of the American Legislative Exchange Council in Phoenix.

We also cover the following stories:

  • House Speaker Nancy Pelosi announces the House is moving forward on impeachment.
  • Pelosi also has a heated exchange with a reporter.
  • Senate Majority Leader Mitch McConnell promotes the importance of religious freedom.

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Daniel Davis: I’m joined now by Brad and Hilary Scott. They are the owners of Halstead, a wholesale jewelry company in Arizona. Thanks for your time today.

Hilary Scott: Thanks for having us.

Brad Scott: Yes, thank you.

Davis: You’ve had this small business in your family for two generations now, I understand. Forty-six years. And I understand that you’re now planning to retract some of your business activity because of a Supreme Court decision that came down last year: South Dakota v. Wayfair.

Some of our listeners might be familiar with it, but if you can just tell us what this decision was about what it does?

Hilary Scott: Right. This was a Supreme Court ruling instead of legislation, which is really important. In this case, they decided that states could extend multi-state sales tax collection to remote sellers in other states.

As a company that operates across the country and around the world, anytime we have transactions to other states, we’re now subject to the sales tax laws of the jurisdiction where the buyer is present. That adds a tremendous amount of complexity in terms of complying now with 50 separate states’ revenue laws and sales tax laws in addition to what we’ve always done historically, which was complying in our own state where we have physical presence, and then of course with the federal government.

Davis: To take an example, if someone in Florida buys one of your products online, you then have to do the math and calculate how much sales tax to cut out of the revenue and send to Florida?

Hilary Scott: Right. This is called the sourcing issue and it’s where the sales tax is assessed. In the wake of Wayfair, sales tax is sourced to the destination, and that means whatever the shipping destination is for the transaction shipment. And so in the United States, there are currently 12,000 different sales tax jurisdictions that we need to be able to handle as a business.

Davis: Well, that seems like an impossible task.

Hilary Scott: It does seem like an impossible task and we are really struggling to handle it.

Davis: How much has this cost your business so far?

Brad Scott: Well, since we were one of the early adopters, meaning that we were live to collect sales tax in October of last year, we started very early on. To date, we have spent in excess of $162,000. The company costs in terms of hours is over 3,300 hours at this point in time. It’s an enormous drain on our resources.

As a small business with 30 people, we don’t have 3,300 hours to devote to tax collection for far-flung departments or revenue across the country. What’s even more shocking really is that in that time, we’ve only collected about $68,000 in sales tax, so we are spending $2.39 cents for every single dollar of sales tax that we collect.

Davis: Wow, that’s remarkable. Have there been layoffs so far because of this?

Brad Scott: No layoffs yet. We’ve had four people leave in the last four months. And though we desperately need to replace them, we’re not. We are downsizing, but it’s through attrition as opposed to through layoffs.

If it does come to layoffs, as a small business owner, that’s not a decision that we take lightly. There are a lot of steps we can take before that. Our employees, they’re an extension of our family in a lot of ways and layoffs [are] probably the single hardest thing you can even consider as a small business owner.

Davis: Well, I would imagine a lot of other small business owners are in the same shoes. When you talk to them, what are they saying? How are they dealing with the compliance costs?

Hilary Scott: Well, yes, we are speaking with a lot of other small business owners around the country. There’s a wide range, honestly. Yes, a lot of businesses are struggling, but what’s most frightening, I think, is that a lot of businesses aren’t even really aware of Wayfair. That means that for the last year and a half, they’ve been accumulating back tax liabilities in many cases, or even if they have zero sales tax due, they’ve been out of compliance on registration and filings.

One of the things that’s very tricky about this ruling is that it’s been discussed in the media as an online retail issue, but states through their policymaking have legislated that economic thresholds are based on gross receipts. That means any kind of business activity, regardless of the business channel, type of product, or type of industry.

So a lot of manufacturers, wholesalers, and distributors are also swept into this compliance mandate, even though they’re not online retailers at all. Again, there’s a major lack of awareness among business owners that this applies to them.

Davis: So if we get three, five years down the line and a state government decides to come after them for all those taxes, they could be potentially out of business?

Brad Scott: Well, it’s even worse than that. Sales tax is a trust fund tax, which means that you’re holding those monies in trust for the government department that you’re collecting it for. And if they do come after a company and they assess that company for a fairly substantial amount of sales tax, if the company doesn’t have the resources, then the owner’s personal assets, their cars, their homes, their investment accounts, their retirement accounts, all become collateralized and are then accessible by the states to finish the completion of payment as they see fit.

Davis: You and your company have clearly incurred a lot of damage because of this. Have you considered suing?

Hilary Scott: Suing isn’t really an option, because if we disagree with the state’s assessment, due to the Anti-Tax Injunction Act, our only option for recourse is to sue in the state where that department of revenue is located.

For a company like ours and Arizona, if this is Florida for example, we would have to sue the Florida department of revenue in the Florida state court system. That’s because of federal law. That’s the only path to recourse. Realistically for an organization our size, that’s no path to recourse at all. We don’t feel like a small business has a real due process option in this situation.

Davis: I would imagine you’re looking to lawmakers to correct this, to make sure the Supreme Court decision isn’t the last word?

Brad Scott: We are. You know, Wayfair was a long-fought battle between the states and even people at the federal level. And when we first started doing or having these conversations, we were under the impression that Wayfair was going to be something that the federal government would deal with right away. They have shown a reluctance to do so.

We’ve been in D.C. pushing for uniformity and simplicity in the rules and regulations that these states are allowed to apply or impose, simply because for a business of our size to remain 50-state compliant, that duty falls on the shoulders of one or two individuals at most.

For most small businesses, we don’t have a [state and local taxes] department, and so if it’s not something that one person can manage, then there’s really no solution.

There’s been a lot of noise about the software available to handle this and simplify it. But in our experience, the software is riddled with problems. We have had 36 different notifications from states over the last 12 months from [streamlined sales tax] states that our software provider was not doing its job, but the states don’t look at it as a problem with the software provider. They look at it as our problem. It’s incumbent upon us to correct for that.

Davis: This is a software that supposed to be calculating the taxes that you owe?

Brad Scott: Right.

Davis: And so it’s giving you bad calculations?

Brad Scott: We haven’t had bad numbers returned to us. The real problem comes in their filing and remittance practices. They don’t necessarily file on time or they’ll file the incorrect numbers. I don’t know about the remittance practices, but we have received a number of notifications that we are out of compliance.

What’s really galling is that in every single one of those cases, we were in compliance. It was failures at the certified service provider level that led to those notifications.

Davis: Wow, that’s remarkable. Well, you’ve also noted that the American Revolution was actually fought over this exact issue of being taxed by somebody out of your own jurisdiction.

Hilary Scott: It’s a little bit of a tricky distinction. One thing to insert in the conversation here is that now that states have established economic nexus laws for sales tax, a number of states are using those same economic nexus thresholds for income tax and gross receipts tax on companies.

Where a sales tax is technically charged to the consumer, it is the responsibility of the business to collect that tax on the consumer in the home state. But there’s a distinction there with income and gross receipts taxes, because those are direct taxes on entities outside the state’s borders on the business itself.

That is indeed what the Revolutionary War was about. It was about taxation without representation. It was about England trying to tax the colonists all the way across the ocean, even though they weren’t there, they weren’t present. Yes, that is exactly what the Revolutionary War was about. The fact that economic nexus is now applied to income tax and gross receipts tax for businesses outside a state’s borders is very concerning.

Davis: When you talk to lawmakers about this, are you encouraged by what they say and do you expect that they’ll act on this?

Brad Scott: I think the greatest challenge when speaking with lawmakers is the fact that there are very few businesses that (a) have clean hands, and (b) are able to speak up.

As Hilary mentioned earlier, the awareness issue is a real problem because if you’re not aware and you’re out of compliance, then by putting your hand up, you’re effectively painting a bullseye on your back. And so, a lot of the businesses that we’ve spoken to over the last year who are out of compliance, while they’re in total agreement with what we’re asking for, are terrified of making any noise whatsoever.

The sounds that they’re hearing on Capitol Hill are from the big companies that are already in compliance because they have 50-state physical presence already, and they’re saying everything is working fine, when the fact of the matter is, it’s the smaller businesses, the businesses that if you believe their rhetoric, are the backbone of the American economy that are going to be the ones that are hurt the most by this.

Hilary Scott: To add onto that, I would just say this is a very complex issue and I think you get a sense of that just in our discussion so far. We understand this in detail because we’re implementing this policy on a daily basis in a business. But when you talk about it at a high level, it sounds very feasible. It’s when you get down into the trenches of implementation where you see all of the problems really shake out.

Communicating the complexity of this issue and the real problems of applying this policy and practice are our greatest challenges. We are definitely finding lawmakers at both the state and the federal levels who are willing to listen to this and take action. I do think we’re going to see a lot of trailer legislation in states in 2020 as they try and address some of the unintended consequences that were not anticipated by economic nexus laws.

Davis: Well, it’s a very, very sobering conversation, that companies like yourself are under such pressure. Thank you both for sharing, Brad and Hilary. I appreciate your time.