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

    October 8, 2013

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]