Online Sales Tax Debate: Impact To Small Businesses

As the U.S. struggles to regain some economic footing, more state and federal politicians looking for ways to balance budgets are turning to the idea of imposing a …

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As the U.S. struggles to regain some economic footing, more state and federal politicians looking for ways to balance budgets are turning to the idea of imposing a sales tax on sales made by online-only retailers. Many argue it is a question of fairness since brick-and-mortar businesses already do it, putting them at a disadvantage. The counterargument, however, is that the time spent figuring out different state and local tax percentages could kill a small online-only business. Many small-business organizations are refusing to wade in – a silent acknowledgment that they support both online and brick-and-mortar retailers. There are currently four bills between the House and Senate tackling the issue, but little agreement between or among legislators and businesses. For more on this continue reading the following article from TheStreet.

An Internet sales tax has long been a hot-button issue in Congress and industry. But as more businesses embrace e-commerce to sell their goods, states struggle to bring in revenue in a struggling economy and political candidates talk tax reform, it’s a button that keeps getting pushed.

It’s, at best, complicated. The Supreme Court ruled in 1992 that businesses that do not have a physical presence in the state they sell to do not have to charge sales tax. Yet the ruling, especially as more and more companies sell goods only through the Internet, means an advantage over bricks-and-mortar small businesses that some call unfair.

The issue gets even more complicated. If a business does not collect sales tax, it’s the consumer’s responsibility to report purchases on their state income tax and pay a "use tax," but very few people actually pay it. So the government is once again turning its eye to the issue, looking to make businesses, even those that sell through Amazon(AMZN), eBay(EBAY) and Etsy, among others, charge sales tax.

For independent retailers, the issue is their very survival, says Jeff Milchen, co-founder of the American Independent Business Alliance.

But whose survival? In a sense, the answer is both bricks-and-mortar and online-only retailers: On the one hand, bricks-and-mortar stores with a sales tax are at a disadvantage to online-only sellers; on the other hand, if sales tax reform takes place, figuring out multiple state and local sales tax percentages could be a nightmare for a smaller online business. Big businesses have the resources and capital to put toward figuring out state and local sales taxes; a midsize e-commerce site could go out of business if owners are forced to spend more time dealing with sales tax issues than selling, making or providing services.

Even-small business trade organizations and lobbyists have had a hard time agreeing to a position on the issue, primarily because their constituents are both online and bricks-and-mortar retailers. The National Federation of Independent Business and the National Small Business Administration declined to comment for this story.

There are four bills between the House and Senate proposing Internet sales tax regulation: the Marketplace Equity Act of 2011 (H.R. 3179); the Main Street Fairness Act (H.R. 2701) and its correlating Senate bill, (S. 1452); and the most recent bill, the Marketplace Fairness Act (S. 1832), introduced in November by Sen. Mike Enzi (R-Wyo.) and 11 co-sponsors — and the most likely to pass, observers say.

"This one has enough potential and effort to get moved through even in an election year. The pain that states are in is putting more pressure on both the states and the government to do something," says Steven Aldrich, CEO of Outright.com, an online accounting program to help small e-commerce sellers.

Backers of the Marketplace Fairness Act, which has been referred to the Senate Finance Committee for review, says it means "states would have the option to collect sales and use tax revenues from out-of-state sellers through a new, simplified tax system."

The legislation would streamline "the country’s more than 7,500 sales tax jurisdictions and provide two options by which states could begin collecting sales taxes from online and catalog purchases."

States that become members of the Streamlined Sales and Use Tax Agreement (24 have already) can require online sellers to collect sales taxes. The agreement would "bring uniformity to the definitions of items in the sales tax base, reduce the paperwork burden on retailers and incorporate new technology to modernize administrative procedures."

 

States that do not wish to join would also be able to collect taxes, but only if they take certain steps to simplify the tax structure and notify the "remote sellers."

"The burden of having to comply … with potentially up to 50 different [state sales tax] — that is a real concern ," Milchen says.

Two big Internet retailers — Amazon and eBay — disagree on the proposal. (Amazon supports the legislation, but as it builds out "distribution facilities" has negotiated with state officials, most recently in Indiana and with South Carolina, to delay start dates for sales tax collection. The extensions are also an attempt to give the federal government time to come up with a simplified solution.)

It seems clear sales tax reform is coming closer to a resolution and less clear how many businesses will be affected. For smaller businesses, the big remaining factor is how low or high Congress will set a tax exemption. The exemption is as low as $500,000 in S. 1832, meaning only businesses that have less than that in annual remote sales will be forgiven the charges and calculation time, while other legislation sets that limit as high as $1 million to $5 million.

While the $500,000 exclusion seems high, Aldrich warns of unintended consequences from the legislation, noting that there will be pressure by states to lower that level even further to include more businesses.

"Most of the folks that would be impacted by legislation aren’t primarily selling in other states. They’re local [businesses], but also selling some stuff on their Web sites," Aldrich says. But selling even one product in another state could mean that the seller has to collect sales tax.

The sales tax issue "strikes at the heart of how do you balance big business with small business — online and offline. This issue is one that’s going to need to get solved," he says.

Small businesses will have to sit tight to see where the legislation settles. Some owners and managers, if they aren’t already, should start making sure they have well-kept records of who’s buying their stuff — a good way to start preparing for whatever legislation does pass, Aldrich says.

This article was republished with permission from TheStreet.

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