June 4, 2013
The once simple world of online business has grown increasingly complex — and expensive — for small business owners. The rapidly expanding mobile audience — expected to reach 7.3 billion by 2014 — and the continued threat of changes in Google’s algorithm probably already has you wondering how much tighter your bottom line profits will get squeezed by factors beyond your control.
Now along comes the Marketplace Fairness Act, informally known as the Internet sales tax bill, to further complicate things for your business.
The controversial bill, passed by the Senate on May 13 and now up for consideration in the U.S. House of Representatives, reads simply on paper. It’s just 11 pages long, compared to another tax measure before Congress that totals 568 pages. And the provisions are easy to understand:
Simple Law, Complex Problems
Any online retailer with gross sales of more than $1 million annually would be required to collect sales tax from customers in 44 states. Six states — Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon — do not have a sales tax. States would have to provide the necessary software to calculate the tax.
That’s all there is to the proposed law, although it could change in the House. But some not-to-simple ratifications to the legislation in its current form include:
• Internet retailers could be subject to audits by 9,600 separate taxing jurisdictions, according to an article in The Blaze. Because many cities impose taxes higher than those levied by their states, the number of taxes small business owners would have to collect is 192 times higher than the number of states in the union.
Just as Turbo Tax doesn’t eliminate income tax complexity, software won’t make it easier for online retailers to manage tax collection requirements, writes Andrew Moylan, senior fellow and outreach director at R Street Institute, where he is the organization’s lead voice on tax issues.
• Online shoppers may start conducting more of their business at brick and mortar businesses. Some 44 percent of persons queried — and 75 percent of those aged 18 to 25 — said they would cut back on the their Internet shopping if the Marketplace Fairness Tax passed, according to a study sponsored by Endicia, an electronic postage software company, and reported by Mashable.
The bill, which proponents say will protect mom and pop stores, could cut sharply into already slim margins for small businesses that meet the $1-million threshold. Based on average profit margins of 2.1 percent for Amazon and companies in the specialty retail sector and 1.7 percent for eBay and other catalog and mail order retailers, an eCommerce business would have to find room in scant profits of $17,000 to $21,000 to comply with to comply with the Marketplace Fairness Act.
eCommerce Retailers Take Sides
Proponents of the Internet sales tax say the measure would level the playing field for brick and mortar companies that must comply with sales tax laws in their own cities and states. Those opposed to the bill, including some conservative members of Congress and most owners of eCommerce sites, say the proposed law is unfair.
“It will be a nightmare for a merchant, a bookkeeping nightmare, says Mitch Gantman, owner of Eyeglasses 123. ”Our cost of business will go up. I believe we will have to register with every state and county in the government. Then we will need to know the tax percentage for each and send multiple checks to each of them.”
Gantman, who also owns a brick and mortar prescription eyeglasses business in New York, says the current system of collecting sales tax does give eCommerce companies an advantage over traditional businesses but that the proposed law goes too far in the other direction.
David Anderson, who has also worked in both online and offline settings — and on both sides of the Atlantic — is more blunt in his assessment:
“Fairness Tax my *ss!” says, Anderson, owner of David Anderson Wealth, a consultancy business devoted to helping entrepreneurs and mom-and-pop operations thrive in today’s competitive marketplace.
“Of course the beauty of the act is that in principal it seems to be fair. The reality is something different. It’s going to cost online businesses time and money to implement the sales tax across all 50 states and, once you have added in the out-of-state shipping costs, you are usually not far off the store price. Now that advantage will disappear. And so will many businesses and jobs.”
eCommerce Merchants Already Burdened
“The burden being placed on eCommerce sites is onerous,” agrees Jim Fitzpatrick, president of Moringa Source. “One of its underlying premises is that online retailers have an unfair advantage over brick and mortar stores. However, online retailers have many of the costs of brick and mortar stores and still have to offer additional services to customers to induce them to purchase, such as free shipping, large inventory commitments, eCommerce specialists, search engine optimization services, pay per click advertising, fulfillment services, server and website maintenance.”
Some E-tailers Support Internet Sales Tax
Abbie Sladick, owner of a Florida-based design and remodelling firm, says it would be a challenge to implement the sales tax requirements for her online business, AbbieJoan.com, “but it is just a part of business.” She says brick and mortar business already enjoy and will “always have the advantage of giving instantaneous gratification, one-on-one customer service and community connections.”
So why does she support the Marketplace Fairness Act?
“I don’t love taxes,” she says, “but I certainly value education and social services. They must be funded somehow.”
Internet businesses have the ability to reach customers all over the country and the world, something brick and mortar businesses cannot do, says Mia Kaplan, an artist who sells jewellery and other pieces of artwork on her website.
She says the proposed law is fair and unlikely to harm her business. Although people who shop at her online store are sensitive to price, they “come to the online stores to find to find things they would not otherwise find locally, or easily.” If people have to pay sales tax to obtain such items, they will, Kaplan says.
Time to Speak Up
New York Times reporter Jonathan Weisman reports that the Marketplace Fairness Act has 65 co-sponsors, including traditionally anti-tax Republicans. He says the bill “faces an uphill climb in the House, but not a steep one.”
If you oppose the Marketplace Fairness Act, write to your representative in Congress — or all 435 of them — and share your thoughts in the comments section here.
Would the Marketplace Fairness Act level the playing field between brick and mortar and eCommerce businesses or unfairly burden Internet retailers?
Katherine Brooker is a New York Times-acclaimed writer whose work has appeared in bestselling books, national publications and professional journals.