Anxiety has begun to rise at e-commerce startups in the month since the Supreme Court upended the rules surrounding internet sales taxes, creating a complex web of state-by-state rules.
At Class-Tech Cars, an online retailer of reproduction auto parts, owner Chad White employs a part-time employee to calculate and remit sales taxes in Virginia and a few other states where his company has a physical presence. “I honestly do not know how we will handle having to increase this collection and remittance compliance, from a few locations to thousands across the country,” he recently told lawmakers at a congressional hearing.
The high court’s South Dakota v. Wayfair ruling will disproportionately hurt startups, forcing them to devote scarce resources to navigating thousands of different tax jurisdictions. As states consider passing new laws to tax online sales, Congress should step in to prevent this ruling from hurting the startups that are driving our nation’s economic growth.
In the span of a few decades, the internet has allowed anyone with a computer and a good idea to build a company and reach a global audience, sparking a new industrial revolution led by hundreds of thousands of small entrepreneurs. The value attributable to this boom in startup activity is staggering: Virtually all new net jobs in this country are created by startups. This is only possible because today’s startup founders can launch their businesses at extremely low cost. From 2000 to 2011, the cost of running a basic internet application fell from $150,000 a month to $1,500 a month. The ever-decreasing cost of launching a startup has democratized the tech sector, creating new tech hubs outside of Silicon Valley.
The Supreme Court’s ruling in Wayfair impacts startups in two important ways: the costs associated with tracking and complying with thousands of different tax jurisdictions and the uncertainty that will chill investment in the e-commerce space.
Recent studies show the average startup launches with $78,000 of funding, meaning that even for even the scrappiest startup, small increases in business costs are potentially ruinous. The most accurate sales tax compliance software currently available starts at $3,000 per year per state, meaning to sell goods nationwide, startups will need to pay $150,000 yearly for software alone. This is almost double the amount of initial funding the average startup receives.
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The barriers to entry for a startup do not end with merely the price tag for software. Almost half of consumers will abandon their shopping cart if the shipping cost is too high or if there are unexpected additional charges at check out, while a website taking too long to load will also drive away customers. Startups without accurate and efficient software to quickly calculate added taxes could see consumers leave before completing a purchase.
Finally, adding layers of complexity to e-commerce transactions will significantly increase the cost of legal and accounting fees. While large e-commerce platforms like Amazon and eBay have teams of lawyers to sort through the new regulations, a 10-person startup doesn’t. Even worse, the Wayfair ruling means that a small startup is now 50 times more likely to be audited, a threat that could shut down any small company.
The quickest way to kill a growing startup sector is to create an uncertain regulatory framework that is subject to a patchwork of laws. It is nearly impossible for a small e-commerce company to plan for 2019 when 50 states are considering rewriting tax laws that could add a significant financial burden, forcing startups to delay rolling out new products or simply stop selling in some states while they wait for the legal landscape to settle.
Finally, additional burdens on startups will discourage early investment. Investors are sure to take note of some of the new laws passed by states that make failure to collect a sales tax a criminal act of tax fraud. Very few investors are willing to face jail time to back a growing e-commerce startup.
We have heard from startups in industries, ranging from online streaming companies to energy drink sellers, that the Wayfair decision is likely to seriously cripple investment and startup creation. It’s time for Congress to seriously consider the added costs the Wayfair decision will have on startups and small e-commerce companies.
Rachel Wolbers is the policy director at Engine, a nonprofit organization that advocates to policymakers on behalf of startups for policies that help grow the startup ecosystem.