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

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 ecommerce 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 ecommerce 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 ecommerce.

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