Lost in the headlines about terrorists in Boston, an explosion in Texas, and unrest in the Middle East, are the pending death sentences of a million plus US small businesses, by a law soon to be voted on by the US Senate. Dressed in the usual subterfuge of political wordsmithing, the Marketplace Fairness Act promises to level the playing field for brick & mortar businesses who continue to see sales losses to Internet competitors. If it becomes law the Internet Sales Tax, as it has been called, will require all merchants who sell to customers outside of their state to collect and pay sales taxes, just like their in-state competitors, even if they do not have a physical presence in that state.
The Internet has been the great equalizer, allowing a mom & pop enterprise to start-up on the cheap and compete for customers with the likes of Sears, Barns & Noble, and other behemoths of business retail. The inability to compete with the prices offered by smaller, nimbler businesses that can be run out homes and small warehouses has resulted in the failures of many retail dinosaurs: Montgomery Ward, CompUSA, Circuit City, Linens ‘n Things, Mervyns, Sharper Image, Borders to name a few. In their places, are vibrant, customer-centric small and large businesses that have been the pillar and engine of US economic growth this past decade. Yet, that is about to change.
Over $20,000 in new yearly costs
Where the Internet offers few barriers to entry, the Internet Sales Tax, will be a bulwark against innovation and growth by burdening small businesses with staggering costs of complying with the tax laws of as many as 9600 different tax jurisdictions. In an economy which is tepid, at best, where does this make sense? For example, if your business was run out of your house and sells a product online to customers in all 50 states; under the new rules, you will be required to collect, & remit sales taxes to all 50 states, and perhaps other counties and municipalities as well. Don’t do this and your business will be liable for the taxes due, penalties, and potentially costly litigation by the various taxing bodies all wanting a piece of your revenues whether you collected their tax or not. Additionally, to be able remit these sales/use taxes, if your business is owned by an INC or LLC, you will most likely be required to register for the formal authority to do business in each state (AKA Foreign Authority). This alone, including the cost of maintaining a statutory agent in each state, will amount to at least $20,000 per year in compliance costs (not even including state income taxes)… for every small business! Let me restate this. Besides the insanity of trying to comprehend, comply, collect, and pay sales taxes to every state & municipality; businesses will now most likely be required to formally register at the cost of over $20,000 per year plus the time or cost to hire someone to do this, and pay income taxes to many of the states; all because their customers reside elsewhere. How many small businesses, who have more than $1 million in revenues (the only current “small business” exclusion) could afford this? Answer, almost none.
How many businesses would be affected?
Based on the 2007 US Census, there were more than 1.6 million businesses with net receipts between $1 million and $20 million. These “small businesses” employed almost 33 million people, paying over $1.1 billion in payroll, and grossing about $5 billion in sales. Of course the Census Bureau’s numbers are considered by most to underestimate small business numbers by half to one third of the actual totals. But, even if we accept these numbers and we lower them by half to a figure more representative of those businesses whose sales will be subject to sales taxes: That is still potentially more than 16 million employees lost if these businesses cannot stay in business due to the new compliance costs. Remember every business required to comply, may have at least $20,000 per year in additional costs to properly maintain their presence in all states, plus additional state income taxes, and finally the cost to collect and remit state and municipal sales taxes.
Yes, it’s true; a lot of states & municipalities are missing out on sales tax revenue from Internet based merchants. But, businesses not operating in those states impose less demands on the state’s infrastructure and less need for the state’s services, which should generate a shrinking in staffing and costs, rather than prompting politicians to find ways to increase taxes. And yes, there are many anachronistic businesses that will continue to loose sales to Internet businesses, but that is a different issue than tax fairness. The answer to these issues is not to create an new Internet tax law which will destroy as many as a million small businesses & add over 16 million to the unemployment lines all in the guise of “fairness”.
CEO & Founder of SmallBiZ.com, created over twenty years ago to help small business owners simplify the process of starting & managing their small businesses. SmallBiZ.com now serves over 10,000 businesses per year with various filing and subscription services; in addition to the 1000's of daily visitors to www.smallbiz.com, accessing free services, help pages, & educational videos & webinars.