POV: Why the Internet Sales Tax is Bad for Small Business

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By Steven R. Power, Bigcommerce


The Senate’s decision on May 6 to back an Internet sales tax will have a profoundly chilling effect on small business owners across the nation.

Under the Marketplace Fairness Act (MFA), states could require online retailers, no matter where they are located, to collect sales tax whenever a purchase is made. Today, online sellers only have to charge sales tax in states where they have a physical office or warehouse.

What’s the backstory here? The MFA, backed by President Obama, is supposed to level the playing field between brick-and-mortar stores and online retailers. But let’s take a look at the big picture, to see who comes out ahead if the bill passes and who stands to lose.

Follow the money

This is a case of compliance costs hurting small online business, while big companies bide their time. Look at the retailers pushing for MFA – Amazon, Wal-Mart, Target. All of them have a huge online presence. They can easily afford the extra expense (and hassle) that comes with keeping track of tax payments in every state in which they sell.

The supposed target of this legislation, of course, is Amazon. The argument goes that by forcing Amazon to charge sales tax, the company loses its purported tax-free edge on brick-and-mortar stores. That’s just not true any longer, and Amazon knows it.

In the past Amazon would have fought tooth and nail to kill this bill. Lately, Amazon has focused efforts on fulfillment speed, building more warehouses in every state to reduce transaction turnaround time. They’re already prepared to charge and collect sales taxes.

Amazon built its business on having lower prices and no tax. Now they’re so big it no longer matters. They can throw whole teams of people at the compliance problem. Small online retailers don’t have that luxury. By supporting Internet taxes, Amazon can simply outlast smaller competitors that can't afford to keep up with compliance.

A small business nightmare

Small online retailers just don’t have the cash or resources for the paperwork necessary to file tax returns in 45 additional states every single month. Many of these companies operate on 10-20 percent margins. The cost of complying with and paying new state taxes will cripple small businesses.

Make no mistake: Small business will suffer. While the bill is targeted at companies with more than $1 million in out-of-state revenue, that’s many more businesses than you might imagine.

These online retailers have to consider Gross Merchandise Value (GMV) to calculate revenue sold through a particular marketplace (like eBay or Amazon). That includes fees paid by the retailer to the marketplace. An online retailer with a GMV of more than $1 million actually turns a far smaller profit. New sales tax and compliance costs will really cut into that margin.

I think the revenue threshold for the MFA should be much higher – at least $20 million in GMV. Anything lower will crush small business growth. 

Who this hurts

My company has nearly 35,000 small businesses using our e-commerce platform to sell online. And while our service doesn't charge transaction fees, many of our clients are multi-channel retailers. They sell through multiple platforms like Etsy, eBay and Amazon, as well as their own e-commerce Web stores.

One retailer sells Halloween masks and costumes – commoditized products for which he has a lot of competition from overseas retailers in China and elsewhere. The tax plan would be damaging to his business. An online consumer could easily opt for his Chinese retail competitor based on nothing more than cost. Another sale lost to foreign competition, where sales tax isn’t an issue.

Another client sells unique tools for bakers that can’t be found in regular stores. The husband and wife who own the company aren't just worried about whether a 6-8 percent cost increase will deter buyers. They're working seven days a week to keep the business going right now. Where will they find time for the administrative nightmare of sorting through the various state and local tax rates? What will hiring more people or tax experts do to their already narrow margins?

The changes proposed by the MFA could drive merchants like these out of business - just like big-box retailers did to small brick-and-mortar operations.

It's time our government started listening to how this legislation will really affect the little guys. Millions of hardworking U.S. small business owners – the lifeblood of job creation for our economy – are just getting by, supporting their families and a skeleton staff on razor-thin margins. Listening to big business alone will throw the economy into a tailspin, and shake the very foundation of e-commerce.


Steven R. Power is Chief Revenue Officer for Bigcommerce. He can be reached at steven.power@bigcommerce.com.

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3 comments

SusanL 06-14-2013 6:58 PM

Thank you for your thoughtful article, so very true in regard to the adverse impact the Marketplace Fairness Act would have on online sellers.  I would like to recommend additionally that the MFA needs to be completely rejected because congressmen have already been discussing droping the bar below $1millina and expanding it to include "remote seller" brick and mortar.  The economics of the bill make no sense.  The AAA- CPA has determined the cost tax payers would spend funding the act would likely exceed the use tax collected.  

Furthermore, recognized accountants are affirming that the cloud companies required to integrate with busineses are far from simple and would be a major hurdled for the smaller companies to incorporate.  The MFA would represent the privitization of tax collection with sellers becoming the tax collectors who would grieviously suffer from burdens of a complex system, including many audits.  Those who would profit would be the tax cloud companies who paint a rosy picture about how wonderfully easy the integration would be and the big box companies.

Furthere, who pays for all of this integration and audits?  The state tax payer.  Yet another tax for the alreadying diminishing middle class!

The MFA, as it is designed, is intended to make online sellers use tax collectors who remit to over 46 states, 600+ Native American tax districts, and the territories.  As you've pointed out, this is pretty much a full time job that small businesses can ill afford.  It would affect a sub-poppulation within the approximatley 17% remainder after one deducts the geater than 83% that the dominant big box sellers' sales tax paid on cash generated from Internet sales (big box companies own lots of real estate).  All smaller businesses would become less competitive with the big box companies, which is why the big box companies are spending over $50 million lobbying to get the act passed (in fact, based on what we've heard from House reps, they are working around the clock to get it passed!)

Equally important, the United States of a American has established its greatness by respecting the autonomy of the respective states in the union.  The MFA would allow big government to transgress important separation between the states and big government in an unprecedented way.  As such, it is an act in which big government is aligned with big business.

The United States has never recovered from a recession without small businesses hiring.  During a time when big businesses are making more money than ever because of their brick n' click status, small businesses have been really struggling.  The MFA would only inpeded the economic recovery when so many people are desperate to enter again the work force and when a disproportionate number of college graduates have been unable to find jobs.

Steven Power 06-16-2013 10:58 AM

Susan, thanks so much for your commentary. I couldn't agree more.

Web Design Firm 06-17-2013 5:01 AM

Steven. I agree with you 100%. I wish more people were aware of the ill effects that this burdensome policy will have.

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