First Things First
As a fellow small business, you need to be aware of the Internet Sales Tax bill – a bill deceptively titled the “Marketplace Fairness Act of 2013” (S.743). This is a bad bill. As if often the case, it does the exact opposite of what the title suggests. The U.S. Senate passed the bill and now we must contact the U.S. House of Representatives before they vote it into law.
On May 7, 2013, the United States Senate passed “The Marketplace Fairness Act.” This bill claims to level a perceived unfairness in the marketplace by forcing online retailers to collect and remit sales taxes to every state and every jurisdiction in the United States. The Senate acknowledges that this demand will place a large burden on online businesses and subject them to audits from 49 other states where they have no physical presence, voting rights or political representation. Instead of addressing and solving the complicated jurisdictional and compliance issues so that the tax may be fairly applied to all online retailers, the Senate arbitrarily exempted all sellers below $1,000,000 in annual sales from collecting and remitting the new sales tax. By taking this approach, the Senate has created a bill that does the exact opposite of what it claims. It punishes some retailers and favors others. This bill must be fixed or defeated.
The ConsequencesIf this bill passes it will produce the following outcomes:
- It will keep small Internet companies small forever. Online companies will never grow past the $1M threshold because they will be punished severely for passing it.
- It will cripple mid-sized Internet companies so they cannot compete with Amazon, Walmart, Best Buy and other large supporters of the bill. Small and mid-sized companies will not be able to afford the cost of compliance and the barrage of audits from all 50 states and many will eventually be forced out of business.
- The cost of compliance for small and mid-size online businesses that do survive will significantly reduce their earnings and imperil the livelihoods of all who work for these businesses.
- Audit risk will be drastically increased for internet retailers. Small online businesses will be subject to audits from remote states where they have no physical presence, no political representation, and no right to vote and the owners of these small companies can be held personally liable and driven to personal bankruptcy for mistakes.
- And much, much more (details below).
Why Is It Unfair?This legislation is fundamentally unfair and unjust because:
- It puts confusing and complex compliance requirements on businesses and makes them responsible to pay into over 9,000 unique tax venues, even if they are collected by one entity in each state. Most states collect taxes monthly. That would require an online business to perform up to 50 filings each month – 600 tax forms and payments per year in addition to all other tax and regulatory forms and remittances they make!
- It places significantly more tax compliance burdens on Internet businesses than it does on non-Internet businesses. For example, it makes an Internet business in Oregon – a state that has no sales tax, incidentally – subject to audits from tax collectors in all other 49 states. (See sections 2.a.i and 2.a.ii of the bill). Every single state in the union can now perform a costly audit on your business, potentially putting you out of businesses.
- It disadvantages growing companies and penalizes them for said growth and job creation. In short, it picks winners and losers – with the biggest losers being the businesses that are most helping with job creation and economic growth.
- It exempts businesses of less than $1,000,000 in revenue from collecting and paying any tax at all. This means that a business with $999,000 in online sales pays zero tax,while a business with just $1000 more in sales pays $70,000 in tax. This is inherently unfair. It also means that growing small sellers will never grow past the $1,000,000 threshold. We will have a whole army of online companies that cannot reach their full potential because they will be punished for growing past the arbitrary 1M mark.
We assert that either all online sales must be taxed or none in order to ensure that congress is not picking winners and losers nor creating adverse incentives.
How Can It Be Fixed or Defeated?
We believe the Marketplace Fairness Act is fundamentally flawed and would be impossible to “fix”. The bill passed by the Senate and currently in the House must be defeated and congress MUST start over.
Any new legislation MUST meet the minimum requirements spelled out in our stance. In short, it must not expose small businesses to unfair and burdensome costs and compliance requirements and it must exempt us from audits from remote states. This means that states will have to fundamentally change their sales tax laws or rethink their approach to “internet taxation” entirely.
Any legislation should also address the concerns and questions outlined in Grover G. Norquist’s open letter to congress.
Let your representatives in the House know you oppose the online sales tax in its current form and that if they levy a tax, it should be simple enough that every company can comply, collect and remit the tax without enduring a hardship. You can download our form letters, modify them and send them to your Representative in the House, connect with other internet retailers and join the fight, and read our more detailed stance here.
The Nitty Gritty
This bill creates an entirely new tax that requires businesses that sell online to collect and pay sales taxes into every state that has a person make a purchase from that state.
The bill is unfair, unwise, heavy-handed, provides awful incentives for small business, and is legally dubious. Proponents of the bill argue that it is about “fairness” and necessary to “level the playing field.” However, the bill purports to relieve one unfairness while merely introducing another, which we’ll highlight below.
We understand why some feel the “fairness” argument to be compelling. However, there are several reason this bill is not fair.
It puts confusing and complex compliance requirements on businesses, and makes them responsible to pay into over 9,000 unique tax venues, even if they are collected by one entity in each state. Most states collect taxes monthly. That would require an online business to perform up to 50 filings each month – 600 tax forms and payments per year in addition to all other tax and regulatory forms and remittances they make!
It places significantly more tax compliance burdens on Internet businesses than it does on non-Internet businesses. For example, it makes an Internet business in Oregon – a state that has no sales tax, incidentally – subject to audits from tax collectors in all other 49 states. (See sections 2.a.i and 2.a.ii of the bill). Every single state in the union can now perform a costly audit on your business, potentially putting you out of businesses.
It disadvantages growing companies and penalizes them for said growth and job creation. In short, it picks winners and losers – with the biggest losers being the businesses that are most helping with job creation and economic growth.
The bill exempts businesses of $1,000,000 in revenue or less from collecting and paying any tax at all.
This means that a business with $999,000 in revenues pays zero tax, while a business with just $1,000 more in sales pays $70,000 in tax.
eBay is currently lobbying to have the limit raised to $10,000,000. If the limit is raised that would mean that any business that crosses the $10,000,000 threshold will be forced to impose a $700,000 cost on customers.
We want to punish growth? Punish success?
We oppose any exemption to the tax, if a tax is levied. It is simply unfair to exempt anyone.
The tax exemptions are actually a disincentive to job creation because they are progressive and punish growth. In fact, for many businesses it will provide an incentive to not just stall, but to shrink.
By moving from $10,000,000+ in sales to $9,999,000 in sales, a business can capture $700,000 in cost savings for customers, which would increase a store’s conversion rates and therefore lower marketing costs, so there is an incentive to shrink one’s business by closing certain operations, slowing sales, or spinning off parts of the business and therefore pay less tax and make more profit.
This same behavior change will happen at all those businesses selling less than $1,000,000 right now. If you are below the $1,000,000 sales mark you’d freeze your growth because a move from $999,000 to $1,000,000 is a $70,0000 punishment. That’s a huge deterrent for small business growth.
Don’t think eBay’s requested exemption is altruistic. By getting the exemption, it would mean that – by our estimates – 99.9% of eBay’s sellers would not pay any tax, so eBay would vastly increase its sales volume and capture a greater share of all Internet sales. Their exemptions request is an effort to capture more sales volume at the expense of other small and midsize online sellers.
Some have argued that an exemption is necessary because of compliance costs. The compliance costs for this bill will be extremely burdensome. But rather than implement unfair exemptions, we feel that any legislation should force state governments to make compliance easy and simple. Any legislation should force states to change their tax codes for online sellers and only require annual payments, and one unified tax rate for all online sales tax. Or, make the sales taxes that would otherwise be owed in other states payable to the home state. Not only would this help with the compliance burden, but it would also allow states to compete on sales tax rate for Internet businesses.
Again, a tax that is so difficult to comply with, so convoluted and complex, that you have to exempt business selling under $1,000,000 from collecting and paying it is a bad tax and is bad policy.
If the bill is going to pass regardless, one way to deal with the cost of compliance for all businesses would be to exempt the first $1,000,000 in sales for every seller. There are some logistical issues that would have to be worked out with such, but that would treat businesses of differing size more fairly.
Or, alternatively, let there be a federal tax deduction – up to a certain reasonable amount – for compliance costs.
But all online sales must be taxed in order to not pick winners and losers nor create adverse incentives.
How can we call a bill “fair” that creates two classes of people merely because one is more successful than the other? This bill hurts all job creators and in fact favors those who don’t create jobs, giving them an unfair advantage.
Replacing one perceived unfairness with manifold others is not right.
In addition to the items we just mentioned, consider the following negative consequences of the bill, many of which are completely antithetical to liberty:
The bill undermines States Sovereignty by giving states the ability to levy taxes beyond their own borders.
The bill creates a situation where there is taxation without representation, putting businesses into jurisdictions that can audit them while keeping those businesses outside representation in that jurisdiction.
The bill damages consumer privacy by forcing retailers to turn over customer data to state governments.
The bill hurts healthy tax competition between states.
The bill faces legal issues regarding due process. (see http://cei.org/web-memo/facts-marketplace-fairness-act-s-743-formerly-s-336 )
The bill creates a new definition of a small business, completely out of step with other definitions. For example, the Small Business Administration defines a small business in the online sales industry as $30 million in annual revenue. The Internal Revenue Service defines a small business at $20 million in annual revenue. The Marketplace Fairness bill arbitrarily defines a small online business as having $1 million in revenue.
Let your representatives in the House know you oppose the online sales tax in its current form and that if they levy a tax, every company should have to collect it.