Tax Reform

Bernie Sanders’ Mittens are the Newest Victim of Anti-Growth Policies

Senator Bernie Sanders became immortalized as an internet meme after inauguration guests pointed out his eclectic attire. Compared to other guests’ Prada and Chanel, Senator Sanders was seated alone, wearing a muted brown parka and brown, geometric patterned woolen mittens. Given the events of 2020, many Americans identified with Senator Sanders’ vibe. Some even contacted Jen Ellis from Essex Junction, Vermont, the knitter behind the mittens, attempting to secure their own pair. Sadly, Ms. Ellis announced she had no more mittens to sell. As an independent crafter, she found regulation and taxes to be too high of a hurdle to overcome. She closed her knitting shop after deciding it was no longer worth it to stay in business.

This story repeats among small businesses across America, especially now that states can tax online sales originating across state lines. In Wayfair v. South Dakota, the Supreme Court found states are within their rights to tax online sales, even if the seller does not have a physical presence with the state’s borders. Now, not only do small businesses with an online presence have to comply with their own state and federal tax laws, but many must now comply with tax laws in other states as well.

Tax accountants have rightly pointed out that the Wayfair decision has caused the tax compliance burden on small businesses to jump exponentially. Very few states follow every criterion that defines a constitutional online sales tax policy established in the Court’s ruling. Even the clearest criterion, that $100,000 in annual sales establishes a threshold where states can begin taxing, is only practiced by approximately half of the states. The remainder follow a grab bag of other threshold policies that can make tax compliance a nightmare for small businesses.

Ms. Ellis is not alone in tax compliance threatening her business. Halstead Bead, a jewelry supply company based in Arizona, does business in 30 states and has had to consider closing after paying $162,000 in online tax compliance costs during 2019 alone. Incredibly, the $162,000 in tax compliance costs resulted in only $68,000 remitted to state governments, or $2.39 in compliance costs for every $1.00 in taxes. Not only is Wayfair killing small businesses, but it has created an insanely inefficient method of collecting taxes.

Worse yet, high tax compliance costs impact more than just a company’s bottom line. Every dollar spent on tax compliance is a dollar not spent on capital investment, creating new jobs or improving employee benefits and pay. Complex tax compliance costs businesses, but it costs employees as well.

Despite nearly three years passing since the Wayfair decision, state online sales tax policy is still very uncertain. States without sales taxes, like Montana, Oregon and New Hampshire, have made the conscious decision to not include sales in their tax base. Other states have taken an aggressive approach in collecting taxes from out-of-state businesses that borders on unconstitutionality. The American Legislative Exchange Council, a membership organization for state legislators, warned the Court states may weaponize their new authority following the Wayfair decision to unfairly target out-of-state businesses.

New Hampshire and placed its state government in between New Hampshire sellers and other states looking to tax their online sales. Now, if a state wants to collect taxes from New Hampshire businesses, the state must get clearance from the New Hampshire Department of Justice to ensure such tax collections are in compliance with the US and New Hampshire Constitutions. New Hampshire sellers are also allowed to deduct any compliance costs from their estimated out-of-state tax burden. Policies like New Hampshire’s help protect in-state businesses from avaricious out-of-state tax collectors, lower compliance costs and increase due process.

The story of Ms. Ellis and her knitting business is one that is all too common, especially during the COVID-19 pandemic. From March 1st to July 31st, 2020, 80,000 small businesses closed permanently.  Realizing the burden tax compliance places on businesses, nearly every state deferred income tax filing deadlines until much later in 2020, but it was clearly not enough to save many businesses. Federal and state lawmakers must become more conscious of the burdens their policies place on small businesses, or Americans will continue to miss out on skilled entrepreneurs and their wonderful products, like Ms. Ellis and her mittens.


In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A …

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