This past May, the federal government got serious about the issue of federal Internet sales tax legislation. That's when the Senate passed the Marketplace Fairness Act of 2013, a law that would require businesses with more than $1 million in revenue to collect sales taxes from customers in all U.S. states and from any localities that charge sales tax.
The legislation has now moved to the House, which plans to completely redo it, to the relief of many online retailers. The Senate’s legislation “is very badly written ... and it would very badly impact all the small and medium-sized online retailers and all the other American businesses that would be buried in paperwork trying to comply with the sales tax rules in 45 states, and Puerto Rico and various Indian Tribes,” says Kevin Hickey, owner of OnlineStores.com, a New Stanton, Pennsylvania-based company that owns a variety of online retail businesses.
Hickey and many other online retailers have formed a group called EMainStreet.org to fight the Senate bill and work toward legislation they say is more reasonable for small businesses to comply with.
The Senate bill surprised online retailers, Hickey says, because it passed so quickly and without the typical hearing. Thankfully, he says, key House members have expressed strong dissatisfaction with the Senate version of the bill and plan to create their own online sales tax legislation. The House Judiciary Committee, led by Chairman Bob Goodlatte (R-Virginia), recently laid out seven principles for what any Internet sales tax legislation should include, including “simplicity,” “tech neutrality” and “privacy rights.”
“Brick & Mortar, Exclusively Online, and Brick & Click businesses should all be on equal footing,” the principles stated. “Laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.”
The Senate legislation exempted businesses with under $1 million in annual revenue from collecting sales tax. However, Goodlatte’s seven principles suggest that he doesn't believe any exemption is fair—and that exemption would deter businesses from growing beyond the exemption amount.
The Minority Media and Telecommunications Council recently put out a paper by economist Jonathan Orszag that argues the Senate’s exemption limit would hurt minority-owned businesses. Orszag points out that the Small Business Administration takes an industry-specific approach to defining small businesses, rather than just a one-size-fits-all revenue limit.
A Piece Of The Local Pie
Many lawmakers in favor of an Internet sales tax cite a University of Tennessee study that found that more than $12 billion in sales taxes goes uncollected annually due to Internet retailers not charging sales tax. However, Hickey and his group say that number is much smaller—closer to $5 billion annually—because the vast majority of online sales is handled through large online retailers like Amazon.com and Macy's that are already required by law to charge sales tax because they have a physical presence in most or all U.S. states.
A study released earlier this year by the U.S. Conference of Mayors suggests that state and local governments will lose closer to $14 billion from sales tax revenue due to online sales in 2013. An analysis by InternetRetailer.com found that 388 of the 500 online retailers with the highest sales don’t currently collect sales tax in all 45 states with sales tax laws, an issue the federal legislation is working to fix.
The Cost Of “Free” Software
Advocates for charging Internet sales tax say it won't nearly be as difficult or as expensive to collect sales taxes as online retailers claim. After all, free tax software programs are already available to small businesses, and they can easily use them to calculate sales taxes in the thousands of locations that charge them.
Ben Kirshner, owner of CoffeeForLess.com, doesn’t buy it. Kirshner’s company sells coffee products across the U.S. and internationally and says that although such software programs may be free to purchase, they can cost a small business like his thousands of dollars in consulting fees to set up and implement into their processes. A small flower shop that just wants to make a one-time delivery of flowers to another state, for example, would need to have this type of software in place in order to do that.
The compliance burdens would also be huge, Kirshner adds, noting that businesses could face sales tax audits from the hundreds of state and local sales tax entities, which often levy sales taxes on unique items or have hard-to-navigate rules. “It’s really a huge burden that they’re trying to inflict on small businesses,” he says.
A recent study released by the True Simplification of Taxation (TruST) Coalition also suggests the cost burden of sales tax software on businesses would be enormous: The study found that it would cost medium-sized Internet-based retailers $80,000 to $290,000 to set up such software and another $57,500 to $260,000 a year in fees, auditing expenses and other costs.
Even if legislation passed that required retailers to collect sales tax in all states, some opponents say there’s a good chance that it would face constitutional hurdles. That's because the U.S. Constitution bans state tax authorities from reaching across their borders and demanding sales tax collection from out-of-state businesses.
Some critics of the current Marketplace Fairness Act suggest that there are other, more constitutional options. Hickey, for example, says he would support a sales tax law that required online retailers to charge their own state or local government’s sales taxes to all their customers, regardless of where they live.
But online businesses may not have anything to worry about for some time. Goodlatte hasn't given any timeline on House legislative action on the matter, and given the recent federal government shutdown, it’s unlikely that Internet sales tax legislation will take center stage again very soon.
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