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Etsy & eBay Sellers Uncertain of Future After SCOTUS Ruling

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Etsy & eBay Sellers Uncertain of Future After SCOTUS Ruling

Small online sellers trying to make some extra cash from a “side gig” face potential extinction after Thursday’s Supreme Court ruling.  On June 21, 2018, the U.S. Supreme Court struck down the “physical presence” test which barred states from taxing out-of-state online sellers in South Dakota v. Wayfair, 585 U. S. ____ (2018).  As Chief Justice Roberts presciently remarked – the burden of the ruling "will fall disproportionately on small businesses." 

Neither the Supreme Court nor South Dakota (whose law was in question) placed a floor on how small a business must be to avoid sales tax filing & collection requirements.  In reaction to the turmoil, the stocks of online sales platforms plunged after Thursday’s ruling.  eBay dropped 2% while Etsy and Wafair were each closer to a 5% overall drop.

Under the South Dakota law, someone selling about $10,000 a year of merchandise in South Dakota could very well be subject to sales tax requirements; and not filing would be gambling with a potential audit that could cost many times total gross sales (notice I say many times total “gross sales,” not total “profits”).  The Supreme Court considered this the “most reasonable incarnation of this scheme,” as Justice Alito put it.  But is it reasonable?  Should a home-based seller with a 10%-20% margin on $1,000 a month of sales to a given state have to shoulder sales tax reporting, collection & payment requirement of $5,000/yr or $600/mo, equivalent to 60% of their total sales and 6 times their actual profits?  Doesn’t the ruling literally place online sellers trying to make money from home on the horns of a dilemma between going out of business or refusing to comply with the law altogether due to the associated burdens with doing so?

The major platforms like eBay and Etsy have been roused by the ruling and are springing into lobbying mode on behalf of small online sellers.  Etsy CEO Josh Silverman called on Congress to craft a "simple, fair federal solution" for the many smaller vendors operating on its platform and similar platforms.

Etsy has called for legislation that would permit microbusinesses to continue, without being subject to onerous state sales tax compliance that is beyond the reach of small microbusinesses. "More than three quarters of Etsy sellers are businesses of one. They have very different needs and challenges than larger online retailers and we are encouraging them to sign a petition that tells policy makers to support microbusinesses like theirs.”

eBay also said in a statement Thursday that Congress needs to "provide clear tax rules, with a strong small business exemption." The company said that any attempt by states to "subject remote small businesses to audits and lawsuits" will lead to "increased litigation across the country to protect small business from unfair burdens.”

Overstock commented that small business innovation and competitiveness would be hampered by the ruling. “Today the U.S. Supreme Court has re-shaped the interstate commerce landscape in a move that could impact small business innovation on the internet, which has been a driving force behind our nation’s economy for the last 15 years.”

The anti-small business pro-oligopoly ruling comes on the heels of a slew of negative market news that indicates the early signs of a recession.  The Philadelphia FED Manufacturing survey reached a 10-month low and is trending lower in a vicious down-cycle.  Housing prices were unexpectedly stagnant in the new FED report.  This is combined with market uncertainty over a potential trade war with China and lower housing sales as the Tax Cuts & Jobs Acts negatively impacts mortgage interest deductions and other cost savings associated with home ownership.

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