The Costs of "Free" Software - An Important Study by TruST
This post references a cost study by TruST, which you can download here.
My name is McKane Davis. I’m the President of Scrapbook.com and co-founder of the eMainStreet Alliance. Scrapbook.com is a family business, and we sell craft supplies though our website and other channels online. I personally oversee all technology for our business and I am a software developer. So I am intimately familiar with software integrations and how they will affect my business and other businesses.
Just before the Marketplace Fairness Act was passed in the Senate, I started exploring the costs to integrate this so-called “free” software into our systems and I got very concerned very quickly. I discovered that in order to be compliant with the Marketplace Fairness Act, my business would have to spend approximately $60,000-$80,000 dollars in the first year - that’s just in just software integration costs alone. Then there are additional costs on top of that. That amount of money is a grave threat to my business.
I reached out to other small ecommerce businesses and quickly discovered that our costs were not an outlier. In fact, these other small business owners had done the same analysis independently and their costs were also extremely high. So we banded together and started the eMainStreet Alliance to ensure that our concerns were heard. We written dozens of op-eds in national and local publications, flown to Washington DC to meet with lawmakers and are doing everything we can to spread the truth about this legislation. We are a grassroots organization completely comprised of actual small businesses. All of the work we do is in addition to running our businesses. Today we have over 700 small businesses in the eMainStreet Alliance and we all volunteer our time to these efforts.
We were grateful to see the recent independent, non-commissioned study released by TruST. This is a very important study as it explores in detail, the software costs for small and mid-sized retailers under the MFA. The authors of the study conclude that:
Mid-market online and catalog retailers ($5-50 million in annual sales) will spend $80,000 to $290,000 in setup and integration costs for the so-called “free software” promised by advocates of the Marketplace Fairness Act (MFA). And every year, these retailers will also spend $57,500 to $260,0001 on maintenance, updates, audits and service fees charged by software providers.
These figures are accurate and very concerning. It is important to consider that Internet retail is a very low-margin business. There is a lot of downward pressure on pricing because all of our competitors are just a click away. Consider that even Amazon.com only has a 1% net profit margin (a margin not uncommon in the ecommerce space) so a business doing $1M gross sales at Amazon margins will only have about $10,000 in profit left over at the end of the year. In fact my own business has had years where we've not even made that much and have lost money or just broke even. For many online businesses software integration costs alone can and will wipe out their entire annual profit, or even put them out of business. As someone who works with software every day, I can tell you unequivocally, the notion of free sales tax software is a myth.
I would argue that any law that could drive any business out of business JUST to collect a sales tax should be a non-starter in Congress. I can see the wisdom in Chairman Goodlatte's guidelines as they provide necessary protections for small online businesses and restore sanity to the conversation.