Online sales tax divides small businesses

A legislative proposal to allow states to collect online sales tax has divided policymakers and small-business owners, but that hasn’t slowed its momentum on Capitol Hill.

The Marketplace Fairness Act would give states the authority to tax merchants from anywhere in the country that sell to customers inside their borders, be it through phone orders, catalogs or the Internet. The Senate approved the measure on Monday, less than three weeks after the latest version of the bill was introduced.

The legislation is intended to level the playing field for brick-and-mortar retailers while delivering additional revenue to state and local governments. It potentially poses major challenges for online merchants, who would be forced to start charging various tax rates for customers who live in any one of the country’s thousands of taxing jurisdictions.

Using a crowdsourced story format, we asked entrepreneurs last month to share their take on the proposal and how it would affect their businesses — and though a few supported the change, most denounced the measure as yet another potential burden on their business.

“This law is a nightmare,” commenter Carrie82 wrote. “I am a small-business owner, and with this bill, I can at best expect about an 80 percent drop in online profits, because I will have to stop selling to states other than my own that have sales tax.”

Many expressed similar concerns, warning that the cost of complying with the new tax mandate will deter small retailers from interstate commerce. Commenter CoachMaria, whose company sells CDs and e-books across the country, said she already stopped selling to several states that tried to collect taxes on her sales.

If Congress approves the change, she intends to stop selling out of state altogether.

“It’s a very costly proposition,” she wrote, noting that the software needed to monitor varying sales tax rates would be too expensive. “No states have the same rate.”

Hoping to ease concerns from the small-business community, the authors of the bill exempted companies with less than $1 million in annual revenue from paying online sales tax. But many have argued the cap is too low to protect small retailers.

“I believe it should be raised to $10 million,” wrote commenter Shirley Tan. “If a business sells $1 million online, it doesn’t mean that they got to keep all the money. They have inventory costs, labor costs, shipping costs. So even though it sounds like, ‘Wow, a business is selling $1 million,’ it sounds like a lot but it really isn’t.”

One Internet giant, eBay, has taken the same stance, sending a letter to users urging them speak out against the bill, or at least urge lawmakers to raise the exemption ceiling.

Taxation without representation?

Other critics include lawmakers in sales-tax-free states and proponents of a smaller government — the latter of whom believe the bill would set a dangerous precedent by forcing business owners to pay taxes in states where they have no presence, and where they therefore have no vote and see no direct benefit from their tax dollars.

One of our commenters shared their concerns.

“Congress is starting something that should be left alone,” Kabscorner said. “Would the online sellers be subject to penalties and legal charges being made by 50 different states? This whole matter is opening a bucket of worms that will only cause a tremendous amount of headache and future legal issues.”

Still, the legislation has plenty of supporters who have helped accelerate its movement through Congress. The Retail Industry Leaders Association backs the bill, as does Amazon.com.

Some of our commenters threw their support behind the idea, too, acknowledging that the government relies on taxes and cannot afford to miss out on revenue from online shopping.

“Taxation is part of the game of business,” Victor Alvarez wrote on our crowdsourced story. “Sales tax has been an issue not addressed because of states’ independent sales taxation. The Internet is forcing states to mingle and share taxation.”

Some entrepreneurs said they believe the bill could actually make it easier to sell products across several states. One of them, a sheep farmer in upstate New York, explained that he and his wife often travel to festivals in other states to sell their wool, yarn and livestock.

Every time they sell goods at one of those festivals, they have the “complex and exhausting task” of sorting out the appropriate state sales tax. However, that may change under the new bill, which requires states to simplify their tax rules before they can begin collecting sales tax from outside retailers.

“The Marketplace Fairness Act provides an incentive for states to simplify their sales tax laws, so that tax categories and definitions are standardized from state to state,” commenter Swcitizen said. “These simplification measures make a huge difference for me — no more trying to figure out if wool is in the same tax category in different states, no more filling out the wrong form, no more needless hours or money spent looking up all the different sales tax rates and figuring out which ones apply to which products.”

Governors from both parties have supported the legislation, which would provide an estimated $11 billion in additional revenue to state and local governments.

But some said they believe those endorsements are misguided, arguing that the number of firms that will lose revenue or close altogether — and the corresponding loss in tax revenue — will eventually outweigh the revenue gains from collecting online sales tax.

To see all the responses, read the full story at www.washingtonpost.com/on-small-business.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he manages the Post's On Small Business blog.
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