Will Mom-and-Pop Sites Be Affected if the Marketplace Fairness Act Passes?

Dec 04, 2013 10:44 AM  By

MFAPicFor more than a decade, federal and state lawmakers have attempted to craft legislation to regulate the collection of sales tax on internet purchases. The Marketplace Fairness Act of 2013 passed the Senate in May with bipartisan support and House bills are now under consideration to achieve the same goals, which are to level the playing field between online retailers and brick-and-mortar competitors and more effectively enforce existing sales tax revenue collection laws.

House Judiciary Committee chairman, Bob Goodlatte, recently released a list of principles that should form the basis of the House bill, which is also expected to enjoy bipartisan support.

The question of taxation of online sales stems back to 1992, nearly a decade before ecommerce really began to take off, when the US Supreme Court ruled that retailers did not have to collect and remit local sales taxes unless they have a substantial connection (“nexus”), such as a physical presence, to the state where the customer lives. Where there was no “nexus” and sellers did not collect the tax, the Court ruling left it up to customers to pay the taxes owed in the form of “use” taxes, but most consumers don’t understand that obligation, and very few bother to comply. This created a loophole for the upcoming world of ecommerce.

One of the reasons cited for the 1992 Supreme Court decision was that merchants who sell out of state would potentially have to comply with the tax rules of over 10,000 tax jurisdictions to correctly collect and remit sales taxes. The Court noted that this would be an “undue” burden to place on businesses, that it would too complex and onerous to require a company to track and manage this massive body of rules.

Organizations that oppose the Marketplace Fairness Act and similar legislation cite this same argument today, particularly when it comes to small businesses: They claim that it is unreasonable to expect small retailers – mom-and-pop ecommerce shops – to comply with thousands of tax jurisdictions. They reference those very large online retailers with operations in multiple states that do invest hundreds of thousands of dollars in staff and systems to manage revenue collection and reporting.

But this argument is based on outdated technologies and ignores key developments that have occurred since the 1992 Supreme Court ruling. Technology is now much more advanced and accessible. Affordable software is available that can handle complex tax calculation and collection compliance tasks automatically, without slowing down transactions.

Opponents of closing the online sales tax collection loophole also complain that it’s unfair to expect mom-and-pop ecommerce operations to deploy and maintain the sophisticated software necessary to comply – that they lack the technical sophistication to manage this task. But this ignores the fact that online sales businesses – even small ones – are technologically savvy.

After all, they’re able to create an online store, attract customers on the web, complete online sales, collect complex shipping information, collect and process online credit card payments and much more. The sales tax solutions available for these retailers require only a fraction of the know-how needed to perform these tasks. And depending on their size and transaction volume, small online retail shops can get a plug-and-play solution for under $30 a month.

While closing the online sales tax loophole would represent an additional expense, for the vast majority of online operators, the cost would be nominal, and implementation and ongoing maintenance burdens would be practically non-existent. There are affordable options on the market now that automatically calculate, collect and file taxes. In fact, automating the process has been found to save merchants a significant amount by helping them avoid the fees and penalties they’d have to pay if they forget to file returns.

The internet began to have a significant influence on culture in the mid-90s, but until 2001, its effect on commerce was much more limited: Websites served mainly as electronic marketing brochures until the infrastructure to support secure payments was developed. Since then, online retailers have enjoyed huge advantages over their brick-and-mortar counterparts – low overhead and access to a global market of potential buyers being the largest competitive edge.

Enacting legislation like the Marketplace Fairness Act won’t take those advantages away – online merchants will still enjoy lower overhead and greater market exposure. And thanks to sophisticated, easy-to-use and affordable compliance software, if legislation such as the Marketplace Fairness Act passes, complying with local tax collection rules won’t prove an undue burden for mom-and-pop ecommerce shops either.

Jonathan Barsade is the CEO of Exactor.

 

 

  • http://harrypotter.wikia.com/wiki/Veritaserum Veritaserum

    A recent non-commisioned study and report pegged the cost of compliance to small businesses at somewhere between 80k and 350k. Nominal? No. Fair? Hardly.
    And those costs assume that the govt mandated software actually works. We made those assumptions about Obamacare and… How did that work out? Disaster. MFA will be an even bigger disaster… Much bigger. If congress wants to make remote small Biz’s the unpaid tax collectors then they must do it in a way that does not require costly and complex software and in a way that applied to ALL retailers. If you claim to support “fairness” then you cannot possibly disagree with those reasonable and commonsensical requirements.

    • smpat04

      I’m not sure where those number came from (I’d appreciate a source), but 80-350k on a “small” business sounds pretty absurd. Since under $50m (revenue) is called micro and $50m-$1bn is called “small”, if a *micro* business has to pay $350k to comply with a law that’s still 1.75%. This is likely a bit higher than traditional businesses must pay for their taxes (there’s a significant economy of scale at work here), but the costs would be passed on to consumers anyway (just like in physical stores). Ecommerce sites would still have a price advantage due to lower infrastructure costs; it would simply put their BASE price back in line with retail stores.
      The idea of a “mom and pop” ecommerce site is, frankly, a bit offensive. The whole concept of a “mom and pop” store was to conjure the image of our parents/grandparents barely making ends meet via hard work and dedication. While I’m not saying these aren’t qualities necessary for an ecommerce site to work (they most certainly ARE necessary), I want to know why our straw men here should have an advantage over the “mom & pop” stores that have a storefront? It’s not like the major corporations are crying over a 1% drop in sales (I think tears start at 2%). And what exactly does a “small business” sell online? The ones I’ve seen sell weight loss pills.
      Just my thoughts; I think it’s clear where I stand on this issue.
      Disclosure: I have no involvement in ecommerce or brick & mortar businesses other than the general consumer interest. I buy my milk at Dominick’s and buy video games from Steam.

      • http://harrypotter.wikia.com/wiki/Veritaserum Veritaserum

        There are literally tens of thousands of small sellers (internet, catalog, mail order, manufacturers) that will be crushed under compliance costs and remote audits if MFA passes.

        And it’s not about an advantage for small niche retailers online vs local stores. It’s about who is responsible for collecting and remitting remote sales taxes and who can audit those businesses and regulate them etc. Charging a sales tax really does not give a material advantage in most cases (people don’t shop online to avoid sales taxes almost ever – proven by multiple studies). But sales tax laws are extremely complex and confusing and exemptions vary from one jurisdiction to another. It is not trivial and software actually makes the problem worse, not better in many cases.

        Furthermore, The MFA burdens one class of business and favors others, and what’s worse, it creates an arbitrary exemption and punishes all businesses who grow past it. It’s terrible on so many levels and is actually less popular than Obamacare (rightfully so, I might add).

        The study I referenced above is here:
        http://truesimplification.org/wp-content/uploads/Final_Embargoed-TruST-COI-Paper-.pdf

        And you can also read similar #s and learn more from small businesses that will be crushed by it here:
        http://emainstreet.org/letter/

        Hopefully that sheds some light on the issue.

        • smpat04

          Well, not much I can say other than “I stand corrected”. Very interesting article, and it’s hard to refute studies by PWC. Thanks for setting the record strait.

  • Keith Yockey

    Veritaserum is correct:
    http://truesimplification.org/2013/09/25/trust-releases-new-cost-of-software-integration-study-for-small-mid-market-retailers/

    Sales Tax simpler than shipping or CC processing? Hardly. Tax districts are not defined by 5 digit zip code. Plug and Play software doesn’t. TaxCloud, for instance, only works for 30 of the 300 shopping carts on the internet. NONE of the software available has a uniform taxibility database. We have no idea if CAs ‘free’ software will talk nice to NJs ‘free’ software. NONE of these packages offer automated filing for multi-channel sellers (Those that sell on eBay/Amazon/websales) which would require the seller to manually file monthly returns to over 600 ‘States’, even if the tax due is $0.

    And I haven’t started on the audit risks.

  • Echord

    I have to say that there is an absolutely ridiculous inference in this article that online sellers are some kind of programming geniuses. Online sellers do not program their carts, cc processing, or any other software we use, any more than anybody else programs Word, Xcel, Access or any other software they use. I don’t know where this author is getting this idea, but if we were programming geniuses, there wouldn’t be such a plethora of online shopping carts and seller sites like Etsy, the Amazon Seller program (for third party sellers), Ebay, etc, and all of them designed with a WYSIWIG back end. In short, we generally do very little programming.

    This is a compliance nightmare. This article is breezing through software compatibility issues and software cost like it’s nothing. Anyone that has ever tried to get two bits of software to talk to each other, know that it isn’t nothing, and is yet another opportunity for everything to break down, numbers to be mis-reported, and a whole host of other issues. That equates to more money spent on your help desk. This is also in addition to the not insignificant cost of whatever software in the first place. This also assumes that you are able to find software that is compatible with whatever cart you are using. If you can’t then you have to look at moving to a different cart which is not only expensive, may not have the functionality of your previous cart without paying double what you did before.

    Also for disclosure – I am a small online business. By small, I mean that we have three people (including myself) that do almost everything. If that’s not the definition of ‘mom and pop’ I don’t know what is. Spending $90K to get compliant with this would put me out of business. Make no mistake – this legislation will do nothing except clear out small businesses from the web. Keep in mind this will also only clear out the American based small businesses, since foreign sellers wouldn’t necessarily have to comply.