Wednesday, January 25, 2012

The Small Business Exemption to the Marketplace Fairness Act Would Preserve Jobs

I am a hypocrite. While a core philosophy of this blog is that the Federal and State governments in the U.S. must shrink the size of deficit spending, when it comes to taking away a tax loophole that directly affects my business, I am an adamant defender of the loophole.

It is only a matter of time until sales tax will have to be paid by out of state customers for online and catalog purchases. There is too much tax revenue available and too much pressure from brick and mortar retailers for the loophole to remain open indefinitely. The argument that “sales tax fairness is about protecting small businesses and local retail jobs that are crucial to America’s towns and cities,” presented by said Rachelle Bernstein, of the National Retail Federation is almost certain to carry weight with legislators looking for new sources of tax revenue..

Currently, businesses are only required to collect sales tax from customers who live in states where the business itself has operations.  So, if a customer in Indiana buys shopping baskets from my Illinois business, I do not have to collect sales tax.  This gives me an advantage versus re-sellers with an operation in Indiana. Conversely, it, also puts my business at a disadvantage versus Indiana online sites competing with me for sales to Illinois customers.

The Marketplace Fairness Act, which was introduced to Congress in November, would create a federal online sales tax giving states the option to collect the sales taxes from out-of-state businesses, rather than rely on consumers to pay those taxes to the states—the method of tax collection to which they are now restricted.

As currently written, the bill provides special treatment for smaller businesses. The bill authorizes a state to require a seller to collect sales taxes only if the merchant's "total remote sales" are more than $500,000 on an annual basis. If they're less, the merchant earns an exemption.

It is challenging to quantify the percentage of online sales that will revert back to brick and mortar retailers once ecommerce sites have to begin collecting 4-9% on out of state sales. However, it is unquestionable that the burden of doing so would incur additional paperwork and software costs. Thus, small ecommerce businesses would benefit from the exemption. It seems likely that without a small business exemption this bill could be the straw that breaks the back of struggling ecommerce businesses and drives them out of business.

While collecting online sales tax would hurt small online businesses, the impact of the sales regained by brick and mortar retailers seems unlikely to be sufficient to lead to much additional hiring. Even when combining all online retailers, they only account for 15% of sales. Breaking off the small percentage of the 15% total accounted for by small sites, and spreading it across the much larger pool of brick and mortar retailers, the incremental sales gained by individual brick and mortar businesses seemingly would be too small to lead to any additional hiring. However, small online businesses closing down would result in job losses.

The key to evaluating the impact on online businesses of adding a sales tax is in determining how important the savings is in generating sales. I may be overestimating the lost sales that would result from the adding of sales tax to invoices. A couple of online retailers that I spoke with judge that their sales would not take too much of a hit. According to Ron Starr of Koffler Sales, "the breadth of products that we offer online insulate us a bit from competition with brick and mortar stores. They simply can not match our wide selection. As an example, we offer almost 1,000 different varieties, patterns, and colors of stair treads." And Tracy Anderson of judges that they have such a big cost advantage versus traditional stores that even after adding in sales tax, their prices will still be enough lower to protect their sales base.

The Marketplace Fairness Act offers a stark example of why it will be so hard to close tax loophole. Every loophole has backers with a rationale supporting the benefit of keeping it in place. In my case, I am a huge proponent of a small business exemption to the Marketplace Fairness Act. A benefit of this loophole is that it will save jobs at small ecommerce sites. Thus, the generalized case for closing tax loopholes makes for a great sound bite, but the  negative economic consequences to doing so makes it hard to muster the votes to actually do so..


  1. Why I support the Marketplace Fairness Act – it will help millions of small businesses like mine

    I’ve been reading a lot recently about proposed (or soon-to-be-proposed) federal legislation regarding online sales tax collection. But what I’ve read has mostly focused on Amazon and other large businesses, and I’d like to take a moment to focus on those who will benefit most by the proposed legislation: small business owners.

    I’m a small business owner myself. My wife and I own and operate a small sheep farm in upstate New York, and we frequently visit festivals and fairs in other states to sell our livestock, wool, and yarn. Upon returning home from each trip, I am faced with the complex and exhausting task of figuring out how much sales tax I need to remit and filling out all the sales tax return forms.

    The Marketplace Fairness Act (MFA) provides an incentive for states to simplify their sales tax laws, so that tax categories and definitions are standardized from state to state and there’s just one simplified electronic sales tax return for all states. These simplification measures make a huge difference for me: no more trying to figure out if wool is in the same tax category in different states, no more filling out the wrong form, no more needless hours or money spent looking up all the different sales tax rates and figuring out which ones apply to which products.

    At this point you may be wondering how the MFA accomplishes all this. After all, the bill simply permits states to require out-of-state retailers (including online retailers) to collect sales tax. But the key is, only those states that have simplified and standardized their sales tax laws would be able to do so. In essence, the bill says that states can require out-of-state retailers to collect sales tax, but only if they make it easy for retailers like me to do so.

    A key part of making it easy for retailers to collect sales tax is technology. As one might expect, there are online services available to manage and even automate sales tax for retailers, from calculation to collection to filing. The MFA plays a key role in helping these services and states work together. It’s even requires a certification process for sales tax management services to ensure that every state desiring collection authority must test the services and verify they adhere to states laws. For the Streamlined States, at the end of the process, if the service passes, the company offering it becomes a Certified Service Provider – hopefully the certification programs prescribed in the MFA for non-streamlined states will adopt a similar system. The features CSPs offer can vary, but for the most part they manage every aspect of sales tax for the retailer—they calculate the sales tax due, file all the jurisdictional sales tax returns, manage tax exemptions, and even take care of any audits.

    Just over a year ago, I grew so tired of having to deal with the current complex and cumbersome task of remitting sales tax to other states that I began searching for some kind of solution on the internet. Fortunately, I quickly found a free service called TaxCloud, a SSUTA CSP service, which began managing my sales tax calculation, collection, and remittance for every tax jurisdiction in the United States. It was not only simple—it’s completely free of charge.

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  3. Part 2

    The combination of this technology and the states’ simplification efforts ultimately unravels a huge web of entangling forms and paperwork, freeing businesses like mine from bureaucracy, promoting efficiency, and increasing productivity and, most importantly, profitability. They make dealing with sales tax much, much easier for small business owners.

    Small business owners like me truly benefit from the simplification of current cumbersome filing requirements and associated expenses. I want more and more states to simplify their sales tax laws, and I know that we need the MFA to make that happen. Therefore, I support the Marketplace Fairness Act.

    As I’ve learned more about the issue I’ve discovered there are many other reasons to support the MFA, but the reason I first found myself supporting this legislation is not one that I’ve seen addressed anywhere: it makes sales tax compliance very easy for small businesses (and probably for large ones, too). It’s particularly important for retailers who sell in multiple states, whether through a website or catalog or at state fairs and festivals.

    We all know that our states are facing major budget issues and need the revenue that the MFA will provide. Don’t get me wrong; I dislike taxes just as much as anybody—but I also don’t like finding out that that the ballot initiatives we voted for in my community are going unfunded because remote retailers are not required to collect the tax we already approved.

    To be clear, the MFA does not create any taxes or raise any taxes. It simply makes collecting the tax already due much easier for the millions of small business owners just like me. Consumers also benefit because they are relieved of the obligation to keep track of and remit the sales tax due on their individual state tax returns.

    Congress, I urge you—enact the Marketplace Fairness Act.