Some small business owners running online retail operations have opposed a federal bill that would make it easier for states to collect taxes on online sales transactions involving their residents.
The Marketplace Fairness Act, which could come up for a vote in the Senate as early as Wednesday, would force online retailers to collect sales tax for the state they’re shipping to. While most items sold online are technically taxable in most states, in practice, most states only require online retailers to collect sales tax if they have a physical presence in that state. For other sales, the obligation is typically left up to the buyer to report and few states enforce the requirement.
By some estimates, the measure could raise as much as $11 billion in tax revenue for state and local governments if passed, and would only apply to businesses taking in more than $1 million in annual revenue.
Shannon Schmidt-Hildago, owner and chief executive of online retail store Green Light Fire Bag, said while some believe the measure would level the playing field between online retailers and their brick and mortar counterparts, it could initially cost her business several thousand dollars to set up systems to keep track of various state taxing schemes.
“We would have to divert those funds appropriated for employees and marketing to software, managing and tracking these sales taxes to safeguard us,” she said.
Her 10-person business, based in Montverde, Fla., sells packs of five eco-friendly campfire kits for $49.99, before a $9.99 shipping charge. Her business has taken in just under $1 million in revenue in total since its founding in 2011, about half of which has come from online orders. She expects to exceed the $1 million-in-sales threshold soon.
“We’re meeting with our attorneys and CPAs as we speak,” she said. She and her team are revisiting their business plan, and are considering reigning in advertising and marketing spending — in any month, the company spends about $2,000 to $10,000 on these areas.
“We go line by line by what we can chop, from the soap to advertising dollars to our product packaging. It’s all on the table for cost-cutting measures.”
She said they’d probably create additional physical distribution channels — increasing sales at campgrounds, for example — and cut back on their online retail if the measure is passed into law.
Others, like Pranav Vora, founder of Washington, D.C.-based menswear line Hugh & Crye, are less concerned. Though 90 percent of the shop’s business is online — the remaining 10 percent comes from its Georgetown store — Vora doesn’t anticipate a huge drop in business, especially since 40 percent of online customers are based in D.C., he said. The business, which makes over $1 million in sales, is currently required to collect D.C. sales taxes because of its presence in the city.
“The great thing for us is that we’re not trading a commodity — we have a brand...Compared to other businesses we might have a little bit of cushion, and there’s not as much concern that a customer is going to another supplier to get them,” Vora said. “If you want a Hugh & Crye shirt, there’s only one place to get it.”
The measure could, however, introduce a new step to the shop’s system. “My concern with this topic overall is the operational support, and the complexity it requires online,” he said. The site would have to account for different sales taxes in each state if the law were passed, and each state has different laws for which items are taxable.
“It’s just one more thing for a small company [to deal with].”
But until he gets more clarity about the timing of the tax’s implementation, Vora said he’ll hold off on getting outside counsel or preparing the site. “I’m in the holding pattern.”
For those significantly under the $1 million threshold, the measure is a distant issue. Vivienne So launched her online jewelry business, Zoetik, last month —she expects the proposed tax will only affect her in a couple of years. In its first month, most of Zoetik’s customers are in New York City, where the business is based, and Los Angeles, So said.
“It’s definitely something to pay attention to, especially for a smaller business like ours. But it might actually become an advantage for us, because we won’t be affected by this new tax law if it does pass. It could potentially help us grow.”
Large online retailers have clashed in their views of the tax — Amazon recently issued a letter supporting the bill and its simplified approach to sales tax, while eBay has opposed its potential burden on small businesses.