Littleton Coin CEO details exorbitant costs, requirements of Wayfair tax ruling
At U.S. Senate hearing, he describes hundreds of thousands dollars, hours spent simply to comply with complicated, unpredictable rules
More than a half million dollars. That’s how much it has cost Littleton Coin Company to comply with the U.S. Supreme Court’s Wayfair decision since 2018, according to CEO John Hennessey, who testified before the U.S. Senate Finance Committee in Washington Tuesday.
That’s not the amount of taxes it has collected for the 45 states and 12,000 local tax jurisdictions. That’s how much it has cost the mail order company in software, consultants and lawyers. And the $500,000 doesn’t include $140,000 in retroactive taxes that the company had to pay to three states to avoid more costly litigation, nor does it include the looming cost to deal with a California demand that the Granite State company start paying income taxes to the Golden State. “Every dollar we deliver spending on compliance is one dollar less we can invest in remaining competitive,” he said.
Hennessey was invited by U.S. Sen. Maggie Hassan, D-NH. Hassan, along with senators from states without a sales tax – Missouri, Delaware and Oregon, which would like Congress to overturn the decision, because, she said, “it forced businesses to be tax collectors for out-of-state government.”
That’s not likely to happen, since most of her colleagues represent states that have collected at least $23 billion in 2021 sales taxes as a result of the Wayfair decision, according to survey conducted by the General Accountability Office. And that could be an underestimate, since only 36 of the 45 states so far have responded to the survey and only 30 provided data. (Some won’t start collecting until next year.)
Even senators from states benefiting from the decision seemed sympathetic to the Hassan argument that there must be a way to simplify the collection process.
The problem isn’t just the sheer number of jurisdictions, but the states’ rules vary in determining whether a business has to file or pay taxes, the taxability of various products, effective dates and deadlines and various registration and audit requirements.
“These variations add to the compliance burden on small business,” testified James R. McTigue Jr., the GAO’s director of tax policy and administration.
For instance, 37 of the 45 states have local sales taxes.
“There is a hell of a lot of confusion,” said Ron Wyden, D-Ore., who chaired the committee.
For instance, he said that Illinois imposes a sales tax on a Twix bar but not a Snickers bar.
“Small business is on the hook to navigate that complex web of regulations, of basically being forced to buy software and hire consultants to get it all straight,” he said. “Congress should step in to create rules about what states can require from small businesses outside their borders.”
‘Tip of the iceberg’
Hennessey and another CEO – Michelle Huie, the founder of VIM & VIGR Compression Legwear in Missoula, Mont. – were a bit more specific on the problems and possible solutions.
Littleton Coin Company — which has been in the state since World War II – is now owned by its 275 employees. He said it paid $225,000 in 2018 alone following the decision on June 18 of that year, but it took nine months to get up and running. After all, Littleton Coin has about 10,000 different products, and each states and municipality has its own laws for classification and exemption. So it had to pay the taxes they were unable to collect during that period.
Since then, it has paid $50,000 for a software license, accounting services and legal advice. “Just last month a routine software update caused an error taking 100 hours to resolve and $5,000 in expense,” said Hennessey.
In addition, many Littleton Coin customers prefer a physical catalogue and to give all the rates in all the jurisdictions would require 40 pages, so it makes it harder to collect the taxes. Also, people like to pay by check, and if it doesn’t include the tax, it simply isn’t worth it for the company to go after such small amounts.
Hennessey also said he pays another $40,000 a year on “a laundry list of non-sales taxes in many states, including franchise taxes business taxes, commercial activity taxes and occupation taxes” that it also can’t collect from customers.
One state, he said, imposed a 27-cent retail delivery fee on any remote retail sale, which would require the company to rewrite its entire computer system.
California’s demand to pay income tax, he said, was the “tip of the iceberg of states reaching beyond sales tax into an unlimited number of new taxes and fees.”
Hennessey said Littleton Coin has no physical presence in that state and that federal law was on its side.
“Despite our strong belief that we have no legal obligation, we must now incur time and legal fees to defend ourselves,” he told the committee. At another point, he said that legal costs to battle the nation’s largest state would be “unlimited.”
So Wyden asked him, “What couple of things could reduce your cost best?”
Hennessey ticked them off:
- No more than one rate per state
- Uniform product classification definitions across the states
- Protection from retroactivity
- Companies could be subject to only one audit
- Protection from reaches beyond a sales tax
Huie echoed Hennessey’s points but added that having to register once would be important because software doesn’t do that for you.
Huie also emphasized the importance of a uniform safe harbor.
Right now the “nexus” for tax eligibility depends on the state. Most states define it by sales. Others look at the number of items. Others also require filing even if you are under the threshold, if you have a physical presence, like a warehouse, or even use an Amazon warehouse. And sometimes, she said, you can’t find out from Amazon what items are stored in which warehouse.
There is some attempt among the taxing states to simplify things, testified Craig Johnson, executive director of the Streamlined Sales Tax Governing Board, but so far only 24 have signed on.
Still, “none of the largest states participate,” said Diane Yetter, president and founder of the Sales Tax Institute, a Chicago consulting firm.
And Colorado, Louisiana, Alabama and Alaska are “troublesome” because they allow localities to self-administer the taxes.
Several senators questioned whether it would make sense to require all states to participate in the board, though Yetter thought some kind of incentive to join would be better.
Wyden said he wanted to work with Hassan and Hennessey to incorporate his recommendations in upcoming legislation. Even senators from states that benefit from the tax seemed open to some sort of simplification.
“Mr. Hennessey, your testimony was pretty powerful, as to the costs you are incurring and the continued costs and complications you have to deal with,” said Senator Ben Carden, D-Md., which benefits from the tax. Simplification would be desirable, he said, but added that the Wayfair ruling does “level the playing field” between online and brick-and-mortar stores, he said he is interested in legislation that would enhance both those objectives.