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 InstallationTools.com 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..