The growth of ecommerce quickly shifted the way small businesses do business. As the Internet has opened up a large audience of customers, and ecommerce retail sales experiencing double-digit growth rates, more and more small businesses are moving online to achieve success.
Along with the explosive growth of online sales, questions about sales tax fairness have bubbled to the surface. Due to a Supreme Court decision from 1992 upholding the federal government’s right to regulate interstate commerce, a state is not allowed to require out-of-state merchants to collect sales tax from residents of the state. This means that many online merchants do not need to calculate or collect sales tax from their out-of-state customers.
While technically the end customer is expected to pay a “use tax” on these purchases, most constituents are unaware of the process by which they can pay. In fact, according to CBS News, states claim they lose $11.5 Billion every year in uncollected sales tax. In the current economic climate, states need revenues to balance their budgets more than ever before. As a result, they are now mobilizing to institute laws to require online sellers to collect sales tax on behalf of buyers just like brick-and-mortar stores.
A trio of bills in Congress
There are three bills being considered by Congress that would grant states the right to collect sales tax from online merchants: the Marketplace Fairness Act, the Marketplace Equity Act, and the Main Street Fairness Act. All three will allow states the authority to require online retailers to collect and remit sales tax on behalf of customers from outside states.
The Main Street Fairness Act creates a simplification system to help online retailers called SSUTA – State Sales and Use Tax Agreement. In order to benefit from the Act, states must be signatories to SSUTA. The Act also exempts any online business with less than $500,000 in gross revenue from sales tax collection requirements. Interestingly, only 24 states have signed SSUTA so far.
Under the Marketplace Fairness Act, which is the current frontrunner of the three bills, online sellers with less than $500,000 in remote sales annually will be exempt from collection requirements. States are required to sign on to SSUTA or simplify the Sales Tax code based on its unique guidelines. This bill is unique for the many choices it offers within its parameters of taxation and simplification. States have a choice to calculate sales tax in three different ways and they also have a choice of whether or not to join SSUTA.
A very close cousin to the Marketplace Fairness Act is the Marketplace Equity Act. Online sellers with less than $1 million in remote sales annually, or less than $100,000 in remote sales in a specific state, will be exempt from sales tax collection requirements. The Marketplace Equity Act does not mandate simplification from participating states even though it makes some provisions.
Why should small business owners care?
Supporters of these Acts believe that requiring sales tax collection for online sales will level the playing field between small, local retailers and online stores and also help states collect an existing tax and improve their budgets.
But opponents of these pieces of legislation believe that this will come at too steep of a price, as they will evy heavy processing costs on small businesses who are selling online. With 9,600 unique tax jurisdictions, it could prove extremely difficult for these small sellers who are just above the exemption limits on these Acts to handle compliance. Our customers who sell online have told us there is a deep nervousness about these Acts throttling the growth many businesses have seen in a tough economy.
For this very reason, it is of utmost importance for small businesses to pay attention to this legislation and contact their representatives in Congress with feedback. All three bills take some measures to ease sales tax collection but all need changes to be business friendly. Regardless of which Act passes, online small businesses should vocalize their needs of clear simplification of the sales tax code with uniformity across states.
The Marketplace Fairness Act, a bipartisan favorite, needs better exemptions for small businesses and also more uniform simplification rules for States. Currently, it only exempts small businesses making less than $500,000 a year in remote sales. A higher limit on the exemptions will not punish a small business just beginning to see success. Additionally, the Marketplace Fairness Act offers states a choice to sign on to SSUTA or abide by a set of simplification rules the act sets out. However, giving the choice to states will result in lack of uniformity and ultimately more processing problems and higher costs for businesses.
An ideal bill would be one that gives an exemption to small businesses under one million dollars in annual revenues. It should have clear and stringent simplification requirements of states. It is important to protect the interests of businesses just starting to see success as imposing hard-to-follow sales tax collection rules on rising stars might prove too much for them and ultimately cost us all in lower economic and job growth. Successful small businesses grow up to become big employers and we shouldn’t hinder them as they get there. Meaningful exemptions and a uniform cross-state sales tax code will go a long way in ensuring the success of our entrepreneurs.
At the end of the day…
Recent years brought some of the worst economic downturns in the United States. Online marketplaces gave entrepreneurial Americans an avenue to turn their fortune around. As their hard work and determination has started to pay off, it is important for lawmakers to take their interests in consideration as they create new laws. At the same time, tax compliance and fair revenues to the states are crucial.
Steven Aldrich is chief executive of Outright.com, which provides online tax and accounting services to small businesses.
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