Will Small Businesses Suffer If Forced To Collect Online Sales Tax?

    October 8, 2013
    Zach Walton
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The Marketplace Fairness Act is one of the most controversial bills currently making its way through the House. Those who support the bill claim it will help brick-and-mortar stores compete with online businesses whereas those who oppose it claim it will harm small businesses. Now one group has published a study finding that the bill would harm specific small businesses even more.

The Minority Media Telecommunications Council put out a new study finding that the Marketplace Fairness Act would harm small businesses, especially those owned by minorities and women. To be more specific, they say that the $1 million small business exemption won’t do enough to protect these businesses.

Do you think the current $1 million exemption is enough? Should the legislation take other metrics into account? Let us know in the comments.

To understand MMTC’s complaint, we have to first look at what the Marketplace Fairness Act’s exemptions. The bill, in its current form, would require any small business that makes over $1 million a year to collect sales tax on out of state online purchases. Opponents want to see that exemption raised to $10 million. When looking at the current state of small businesses, it certainly seems that a higher revenue threshold is needed.

A story published in September profiled a small business owner who makes about $3.5 million a year. Under the current proposed exemptions, he would have to collect state sales tax on all online sales made from outside of his state. Now, $3.5 million sounds like a lot, but he reported only $350 of operating income after all was said and done last year. The cost of having to comply with the Marketplace Fairness Act would put him, and countless other small businesses, in the red.

So, what does MMTC suggest lawmakers do about this? It says that “we need to think carefully about coming up with a more accurate definition of small businesses.” It suggests that lawmaker define small businesses by using the Small Business Administration’s definition. In other words, lawmakers should define small businesses on a case-by-case basis that’s determined by the industry it’s in and the number of employees it has alongside its revenue.

To be more specific, here’s what the SBA says constitutes a small retail business:

  • Most retail trade industries: $7 million
  • A few (such as grocery stores, department stores, motor vehicle dealers and electrical appliance dealers) have higher size standards, but none above $35.5 million (or 200 employees for New Car Dealers only).
  • Retail Trade NAICS codes and their size standards do not apply to Federal procurement of supplies. For Federal contracts set aside for small businesses a concern that supplies a product it did not manufacture (which is what a retailer would do) is a “nonmanufacturer.” To qualify as small for Federal government contracting, a nonmanufacturer must: 1) have 500 or fewer employees; 2) be primarily in the wholesale or retail trade and normally sell the type of the item9s) being supplied; 3) take ownership or possession of the item(s) with its personnel, equipment or facilities in a manner consistent with industry practice; and 4) supply the end item of a United States small business manufacturer, processor or producer or obtain a waiver of such requirement pursuant to SBA’s regulations. This is called the “nonmanufacturer rule.” This rule does not apply to supply contracts of $25,000 or less that are processed under Simplified Acquisition Procedures.
  • There is a large variety of rules for other industries, but the Marketplace Fairness Act would predominantly affect the retail trade industry. Of course, the SBA’s definitions seemingly apply to brick-and-mortar small businesses as it makes no mention of online sales. Maybe the SBA should come up with new rules for online sellers, especially those who operate their own business through their own Web site alongside third-party seller sites like eBay and Etsy.

    Speaking of eBay, the online seller has come out strongly against the Marketplace Fairness Act for many of the same reasons that the MMTC does. In a FAQ on its “Main Street” advocacy Web site, eBay says that it’s “opposed to the current definition of a small business in the legislation, which is exponentially less than any other relevant federal standard for defining a small business.”

    eBay goes even further to say that the current $1 million exemption in the Marketplace Fairness Act only serves to protect the “casual online seller.” In other words, it would only protect your mom as she sells off a few family heirlooms a year on eBay. There would be no protection for the small business that also operates an eBay store to get their product out to more people.

    In short, utilizing the Small Business Administration’s definition of a small business seems like the way to go. Defining a small business by the amount of money it makes is certainly metric to keep in mind, but it’s not the only thing that defines a small business. Keeping it focused strictly on revenue ignores the many costs that are associated with running a small business. Making these businesses keep track of sales tax rates for over 40 states would only add to those expenses, and would maybe even lead to those businesses having to cut back on other expenses, like employee retention programs.

    Do you think the Marketplace Fairness Act should use the SBA’s definition of a small business? Or is using revenue as the sole metric fair? Let us know in the comments.

    [Image: Thinkstock] [h/t: The Hill]

    • http://newagebusinessloans.com/ New York Small business loans

      Small businesses are following “brick & mortar”. Under the current exemptions, the business owner would state sales tax on all online sales made from outside of his state. It applies s only those small businesses profiled a small business owner who makes about $3.5 million a year.

      • John

        No. It is revenue of $1 million. If you have revenue of $1 million and a profit of $1 then you have to comply. I agree it should be industry specific and higher thresholds. Of course this is the way the government does stuff. One size fits all approach.

    • http://www.cartridgesave.co.uk A Morris

      We’re an English company so I guess we’re exempt from this! However, it is always a worry that online businesses might get slammed with some weird tax scheme. In the UK we’ve had a spate of major businesses avoiding paying taxes (Starbucks, Amazon) so it seems very unfair the smaller businesses get hit with something.

    • http://impactairsoft.net Art

      For the small amount earned online and the competition tax will definitely hurt your business. We get taxed when we sleep, when we rise and 9/10 of taxes are dreamed up out of nothing.

    • http://www.gbepackaging.com Bob Teal

      OK Call one of the companies that sell software to collect taxes and you will find out there is none. Someone would have to enter every county tax in the country and keep it up to date every year and you would have to have each customer report what county they are in as that is what tax is based on. some counties tax shipping and some do not. some counties tax handling and some do not. No shopping cart I know of offers that ability or asks customers what county they are in. Coders charge 115 dollars an hour for anything so I cant imagine what it might cost to just set up the tax collection on a shopping cart. Some carts are rentals and at 200 dollars a month now it will be much more if taxes are added to the scheme. We have the lowest price for packaging that I know of but that would change if we add taxes to every order. If you own your own shopping cart like we do then its all on you to pay what it costs to be legal and I do not know too many companies that can afford this kind of overhead. Are we going to let the government get involved in everything and put us all out of business? I guess that is the question because we get price increases weekly now from the manufacturers and we have to pass those on but we have not raised our profit for over 4 years now. Who can when cost are rising so fast.

      Well if you know of a shopping cart that does it all for less let me know please. We certainly cant find one. But we do have the lowest price now so better stock up while you can.

    • Robbie

      As I’m in the UK, this won’t affect me. But, it will most definitely harm small businesses in the USA, and it’ll harm consumers too who will be forced into paying more.

      What people often don’t understand is that these costs ALWAYS transfer to the customer. If a retailer faces a new tax, that tax will be added to the cost of the item.

      Large corporations can afford to spend more, because they can afford to save money by not paying the taxes they owe to the government. This means that now, thanks to this new tax, small businesses will be being screwed TWICE by the corporations and their big buddies in government.

      Any small business owner who supports this bill should close shop tomorrow, because they don’t know the first thing about business or how this hands a massive advantage to the largest corporations in America.

      This will seriously damage small businesses and force buyers further into the clutches of immoral corporations already infesting the US government.

    • Timothy Knoop

      Here’s an idea. Bring back the ILLEGALLY REMOVED original 4th amendment which states that only government employees shall be charged income tax

    • http://nfanflorida.com/ NFAN

      What we do not need is more complications in an already complicated marketplace. The internet is a unique marketplace and should not be grouped in with other businesses.

    • http://www.gbepackaging.com Bob Teal

      Also wanted to mention it is not just 50 state tax codes. every county of each state has there own tax code and many change in the middle of a year and not Jan 1. That’s over 9000 counties and tax codes all different. Why we have over 50 tax codes for the state of Wisconsin alone. What are they smoking in Washington.

    • John Q Siteowner

      Total crap that the million dollar exemption only protects casual sellers….Us niche site owners have been getting creamed by Google putting all the big guys first in search. This would be great for us…If I gross over a million I can afford to deal with online sales tax

      • http://www.gbepackaging.com Bob Teal

        Because Google treats you and all of us unfairly its OK to screw everyone else. Great Logic

    • http://www.insuranceprosguides.com James L Young

      Remember the quote, “The power to tax is the power to destroy.” This is not about fairness but about tax and spend. Government’s appetite for more and more tax dollars is insatiable. We should fight all efforts to tax internet business. No revenue or metric-based taxes.

    • http://computer-news-technology.net mark williams

      I am in favor of a 1 percent nation wide internet tax and propose an increase of 2 percent on brick and motor stores like wal-mart. Then we still have an advantage online and the gov gets theirs. Better than the ether way,

    • http://www.kentuckyspecialfx.com Mike Bisch

      I have owned and operated our website store for over ten years and if we were to get taxed for online sales other than just local state tax we would be in deep trouble having to raise prices on all our items and limiting our competition with over seas items.
      Im sure our custom built section would hold firm but our web sales would suffer more than they already have from Google updates.
      Between Google updates, Bing updates, Yahoo updates it’s near impossible for us to create new items and expand.
      I spend 30hrs tweaking the website and well over 40hrs in the shop every week, trying to battle the competition and then keep up with algorithm changes is enough to drive a sane man mad.
      Now Taxes? Are you kidding me?
      This country was built on free enterprise but now that we the people want a sample of free enterprise the odds are against you in every fashion.

    • http://n/a SENTRY

      URGENT ! EVERYONE READING THIS: Send emails to your U.S. Senators to
      DEMAND that NO SALES TAXATION (for Internet Sales) BILLS BE VOTED FOR EVER !!!!! N O SALES T A X E S online !
      REMEMBER: NEARLY every retail store has a WEBSITE ALSO !
      States want to GRAB YOUR MONEY ! This advantage HELPS KEEP GREAT DEALS for EVERYONE when ordering ONLINE !!!

    • http://www.onlinebusinessideaguide.com Nicko

      Great post, do you have a online business ?
      Then I advice you to registerer it in Norway !

    • http://www.crystalflyshop.com David Johnson

      So many citizens and so many politicians JUST DON’T GET IT! I own a retail store and sell online. My yearly sales are 20% in shop, 80% online simply because of the spending habits of consumers. Internet sales have destroyed entire sectors of retail, and robbed the government tills of trillions of dollars–at a time when we are racking up debt at such a rate that it will never be paid back and our economy could collapse at any time.

      The country needs a federal flat rate internet sales tax of 7%, and all internet sales need to then be exempt from state and local taxes. That is going to be roughly the same rate as what anyone would pay walking into a store–or less. Less brick and mortar stores would continue going out of business–and hundreds of thousands of jobs would be saved that have been wiped out by huge internet businesses that only care about their corporate profits.

      It would be simple to keep track of, and impossible to cheat on since it would all be documented online. Our country could get back on the right financial track–could afford to rebuild its dying bridges and highways, could afford to defend itself, and afford to secure its borders to protect more American jobs.

      In spite of a national internet sales tax, internet sales would probably still continue to grow because of its simple convenience–there are lots of people who shop in their spare time at night, or who live too far away from a brick and mortar that sells what they want. As the younger generation–already too enslaved to the internet and their smart phones–ages, their addiction to the internet will only grow. No one will stop buying online who already does.

      And if this legislation can drive a little more traffic into brick and mortars, save and/or create a few more jobs, rebuild this country’s finances, AND MAKE EVERYONE PAY THEIR FAIR SHARE, (AND IT WILL DO ALL OF THESE THINGS) THEN WHO IN THEIR RIGHT MIND DOESN’T AGREE TO THIS?