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Will a New Online Sales Tax Really Destroy Small Business?

By Tamara Walsh - Apr 23, 2013 at 8:15PM

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How a new sales tax will affect consumers and online retailers.

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 (AMZN 2.57%) and eBay (EBAY 1.43%). 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 (BBY 8.97%). 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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