Internet Ruling Puts Texas Small Businesses at Risk

The U.S. Supreme Court recently decided a major case that will affect the purchasing power of most Texas consumers and the livelihoods of thousands of small-business owners across the state. The court ruled that states can now require virtually any retailer located outside of their state borders to collect and remit sales taxes on internet purchases made by residents of their states.

You probably have noticed that with internet purchases, sometimes you have to pay sales tax, and sometimes you don’t. The reason is because of two previous long-standing Supreme Court decisions. Those decisions said that if a seller that is primarily located in a state different from where you live has a building (like a warehouse) or employees located in your state, the seller has to collect sales tax from you. It’s referred to in the tax world as “nexus.” If the out-of-state seller doesn’t have nexus, it doesn’t have to collect sales tax from you.

Now, any state government, and potentially some local jurisdictions, may require all out-of-state companies to collect and remit sales taxes on purchases by residents of their state.

The decision will mean the prices of many goods you buy online are going up. The effect of higher prices on consumers may be unwelcome, but the impact on small internet-based businesses could be devastating.

Most small businesses simply don’t have the personnel, accounting software and systems to figure how much they should pay and to whom, or to prepare all the necessary paperwork. All of this, on top of losing customers because of higher prices, may well put many home and small businesses out of business.

The justification for the Supreme Court decision is twofold. One, it’s not fair to “brick and mortar” businesses that if you buy a book in their store you have to pay sales tax, but if you buy the same book over the internet, you don’t have to pay any tax. And two, states where massive retailers are not located are losing huge amounts of badly needed tax revenue. These are valid arguments.

The focus should now turn to state legislatures and the U.S. Congress. How will each state implement its new taxing power? Importantly, will states recognize the potentially devastating effect on small businesses in their state and provide common sense exemptions. It is possible that Congress may pass legislation that would provide a consistent, national solution to the tax collecting and remitting process.

But one thing is certain: Get ready to pay more online.

Jeff Johanns is a lecturer of accounting in the McCombs School of Business at The University of Texas at Austin.