Will a New Online Sales Tax Really Destroy Small Business?

Online retailing has grown into a multibillion-dollar business, as more consumers head to the Web to shop. This trend in online spending has been a boon to Internet retailers, such as Amazon.com  (NASDAQ: AMZN  ) and eBay (NASDAQ: EBAY  ) . However, not everyone is happy with the massive influx of online shoppers. State governments, for example, complain that billions of dollars in sales taxes are lost each year under the current legislation.

Based on a 1992 U.S. Supreme Court ruling, only retailers with a physical presence in the state are required to collect sales tax. Of course, this came back to bite Amazon last year, when the e-tailer was forced to start collecting taxes in states where it had warehouses. Today, the tax war rages on, only this time it's not Amazon that's opposing it.

Word on the street
The Senate is expected to vote this week on a possible Internet sales tax law, which would force out-of-state online retailers to collect state sales tax, regardless of whether they have a physical presence there. eBay and others against the proposed legislation argue that the bill, if passed, would put an unfair burden on small business.

In fact, eBay CEO John Donahoe reportedly sent an email to tens of millions of eBay sellers advising them to fight Congress on the bill. He went on to say, "The legislation treats you and big multibillion-dollar online retailers -- such as Amazon -- exactly the same," according to The Wall Street Journal.

This, perhaps, explains why Amazon suddenly supports the new taxation policy. You see, the Marketplace Fairness Act, as it's being called, would be an encumbrance to smaller online sellers that don't have the resources of larger rivals such as Amazon. Not to mention that Amazon is already required to charge sales tax on purchases in nine U.S. states, including Arizona, California, New York, and Texas.

So just how fair is the Marketplace Fairness Act?

Large and in charge
For years, Internet-based retailers have had a tax advantage over bricks-and-mortar retailers such as Target and Best Buy (NYSE: BBY  ) . Amazon, in part by not collecting taxes, was able to offer the lowest prices possible. As a result, consumers began using Best Buy and other big-box stores to comparison-shop. Customers would visit Best Buy to interact with the products and later make purchases elsewhere online.

Best Buy continued to ignore the problem of "showrooming" and ultimately saw its market share deteriorate. It's not surprising, then, that bricks-and-mortar retailers are on the side of state lawmakers in pushing for a national Internet sales tax bill. However, will the new tax really sabotage small online businesses?

Tax grab bag
While collecting taxes may be a burden for smaller online retailers, it's hardly a death blow to such businesses. For one thing, the bill applies only to merchants generating more than $1 million in annual sales. Nevertheless, eBay argues that if passed, only businesses with $10 million or more in annual out-of-state revenue should be required to collect sales tax, or companies with 50 or more employees.

Whichever way small business is described in the bill, I doubt the end result will be as dire as eBay would have us believe. Still, Amazon is far better prepared for this tax legislation, as it's already collecting sales tax in some states.

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Read/Post Comments (13) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 23, 2013, at 10:41 PM, Phalanx2006 wrote:

    I don't know what effect this tax will have, but I am tired of getting nickel&dimed by government greed.

  • Report this Comment On April 23, 2013, at 11:38 PM, bigdan59 wrote:

    I live in Alaska, why in the hell should I have to pay another states sales tax? We do not have a state sales tax, but most of the city's and towns in Alaska do, but if I order online or via phone to a city with sales tax, they don't charge it. I will just resort to phone orders if they pass this law. I see it killing sites like amazon.

  • Report this Comment On April 24, 2013, at 12:34 AM, yaovk wrote:

    There are just too many tax cheats, loopholes, and tax avoidance through foreign/offshore accounts. The rich are really the best artists to avoid paying taxes. And we have Republican politicians who are bankrolled by them to maintain and fight for their greed. Look at now with our financial difficulties created by the Bush phony wars and more tax breaks for the rich, the republicans are still entrenched like the Taliban to help them loot this country. Boehner, Ryan and the like are crooks and they don't care about the good of the country.

  • Report this Comment On April 24, 2013, at 12:49 AM, dsliesse wrote:

    The headline on this article perpetuates a misconception. This is NOT a new tax. The proposed law allows (not requires) states to require online businesses to collect sales tax.

    Note that anyone residing in a state that has a sales tax, and who does not pay a tax, is already guilty of tax evasion. EVERY state that has a sales tax also has a use tax of the same amount that is required to be paid on purchases made out of state, usually limited to the extent that sales tax wasn't paid. So, for example, if your state has a 9% sales tax and you paid 6% elsewhere, you owe your state 3%.

    Granted, a small percentage of people are aware of the requirement to pay use tax, and probably a smaller percentage of the people who know actually do pay it. It's especially problematic in states with no income tax, since there is no cause for anyone to routinely look for tax forms.

    I happen to be a small business owner, albeit in a service business, and I think the burden on small businesses is being overblown. The biggest headache is going to be determining what the proper rate is; collecting it will be no more difficult than collecting it for in-state sales (acknowledgment here that the burden is significantly higher for those in states that don't charge sales tax).

  • Report this Comment On April 24, 2013, at 12:51 AM, yaovk wrote:

    Is this forum owned by the Republican? Why won't you print my comment?

  • Report this Comment On April 24, 2013, at 12:56 AM, SuntanIronMan wrote:

    @bigdan59

    You (as a consumer) wouldn't have to pay another state's sales tax. You would pay the sales tax of your state, county, city, town you are located in.

    This bill involves online retailers collecting sales taxes of everywhere else.

    For example:

    - An online retailer located in Maryland.

    - That online retailer has a customer in Virginia.

    - That Virginia customer buys one of the retailer's products.

    - The Maryland online retailer collects the Virginia sales tax from that Virginia customer.

    - The Maryland online retailer gives that collected sales tax to the state of Virginia.

    For the Virginia customer, the transaction happened just as if he/she was buying something from a Virginia brick and mortar retailer.

    The complicated part occurs to the Maryland retailer, who has to keep track of each state/county/city/town's sales taxes and pay each accordingly.

  • Report this Comment On April 24, 2013, at 2:04 AM, thenightpoet wrote:

    Well here is just a thought. They wanna tax online, you can all continue to shop all you want. Me I am done shopping online. There is a great saying, where there's a will there's a way. I'll get my items from other places.

  • Report this Comment On April 24, 2013, at 2:52 AM, gottasay wrote:

    One minute, the states are fighting the "federal government" from getting involved in state affairs, the next minute the states are appealing to Congress for a law that will give them more money. For what? To use at their discretion?

    I don't want to see the law passed personally, but if it is, it should be conditional to be applied to the needs of the state's residents: no money should go to any corporate entities in any way shape or form. Social Programs, College assistance, Job retraining, Housing Assistance, Healthcare assistance. Stuff of that nature.

    Then again, maybe Corporate America will get their just dues. Bet China won't charge or collect tax....

  • Report this Comment On April 24, 2013, at 9:51 AM, CED1968 wrote:

    The issue is not collecting the tax, tax collection is a matter of a database with ZIP data and tax rates, relatively easy for any merchant to implement. The issue is the remittance of taxes to the states. If you are a small business and you have to file sales tax in 50 states, that is an undue burden that could cost thousands of dollars. In my case, my internet retail business is less than $1MM and would be "exempt" from collecting the tax, but if you cross that magic threshold of $1MM then you have to remit to all of the states that have sales tax. THAT is the headache. What should happen is that the Federal government could act as a clearing house and small businesses would download from the IRS a file of tax rates and jurisdictions that are then applied to sales and tax collected is remitted back to the IRS with the same information and THEY can distribute it back to the states. This idea that customers shop on-line because they don't have to pay tax is bogus. It makes sense when the tax is quite large on a larger purchase, but most people shop on-line because it is fast and convenient and because an on-line retailers can carry 100x the merchandise that a bricks and mortar retailer can. Our confinement is limitless, theirs is the size of their store.

  • Report this Comment On April 24, 2013, at 2:24 PM, cdredhead wrote:

    I agree with CED1968...the sales tax issue will not have a major effect on the consumer. I live in California and there are very few online retailers that do not have a presence here; therefore, pay sales tax on any online purchase. No big deal. I shop online for the convenience.

    As for the small business owners, many that I know already collect sales taxes for each state (just to make sure they don't get hit with tax evasion issues later). Also, many do not have $1 million in sales, so it's a moot point.

    I worked for a dotcom back when they first started and trying to figure out to which states the company had to pay sales tax was a major hassle. Eventually, the company (which survived the bust) charged sales tax for each state. Presence in a state gets to be tricky when you involve distribution warehouses.

  • Report this Comment On April 25, 2013, at 9:44 PM, tgc9184 wrote:

    People. I don't know about other states but in NY each COUNTY and CITY can have different tax rates. It's not just 50 states and 50 rates.

  • Report this Comment On April 25, 2013, at 10:06 PM, SuntanIronMan wrote:

    Are sales to US territories and protectorates also subject to this proposed law?

  • Report this Comment On April 28, 2013, at 10:37 AM, DonHicks9600to1 wrote:

    Let's call this what it is, a USE TAX not a sales tax.

    Sales Tax supports the community that supports the business that made the sale. USE TAX apparently views everyone in a tax jurisdiction as a revenue stream.

    If this is so easy then the B&Ms should do it also.

    There are 9600 different sales tax jurisdictions in the US. There is a major firm offering to do this at $1.50 or more per transaction or at an initial cost of as much as $7,300 or more. There is a cost of manpower and resources to interface this software and adhere to 9600 jurisdictions and this is not true for the Brick and Mortar stores. If this is to become the law of the land and it is so easy, then B&Ms should do it also. They will need to ask for ID and charge sales tax based on the customer's address as well. It would only be Fair!

    It is A Sales Tax, not a Buyer's Tax

    There is a better way. Allow the dealers to charge sales tax from their jurisdiction as sales tax was first created. The "Use Tax" deviates from the real reason sales tax is collected, to provide police and fire protection, roads and infrastructure, educational support and more that makes it possible to build a business that creates the sale.

    We need to support our local communities where we built our businesses. Let's do this fairly in deed as well as in name. Charge a sales tax from the dealer’s jurisdiction, one tax not 9600. Dealers already do this for instate sells. This adds no new laws, no new taxes. It only repairs what has been wrong and gives money to the communities that support the dealer. It does not even affect the commerce clause.

    Buyers have a choice where they buy and what they pay. If they do not like a tax from a jurisdiction, they can vote with their feet and buy elsewhere on line or on Main Street. Bring sanity back to this process.

    Please visit TheInternetSalesTaxSolution.com. Please ask questions, make comments and help us bring this question around to one that makes sense for everyone.

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