The Marketplace Fairness Act is Unfair

April 25, 2013 by Paul Byrne

Business Environment
Marketplace Fairness Act

eBay has created a helpful web page so that it is easy for you to make your voice heard.

The current form of the Marketplace Fairness Act is inherently unfair. Here are the top 5 reasons:

It creates an undo complexity burden on small business

I covered this point thoroughly in my prior post.┬áThe short of it is that online stores will have to file, pay and be subject to audits of sales tax to 50 authorities. Local businesses only have to deal with one. This can easily lead a business whose profit is less than $100,000 per year to incur an addition $17,000 to $21,000 administrative expense. This doesn’t include the cost of the software and programming to handle it. If you want to address this problem, shift the tax collection authority to a single location for small businesses, i.e., their official address.

This will result in the loss of jobs, opportunities and a decrease in entrepreneurship.

It favors Canadian and Mexican companies at the cost of American businesses

Also covered previously. The states will have no jurisdiction to collect sales tax from our NAFTA partners who ship from locations on our borders. This will move jobs and investment to Canada and Mexico.

The floor for defining a small business is too low

Even if you swallow the arguement that this legislation is necessary, many online businesses with sales of $1,000,000 have less than $20,000 in annual profit. The internet is an extremely competitive marketplace. Margins are often razor thin. Many don’t become profitable until they hit $10,000,000 or more. This additional administrative burden will be a cost to the business whether or not it makes a profit.

There is no growth equation for future years

Even if you accept that the law is necessary AND that the definition of a small business is correct, inflation and competitive pressures will make the math completely outdated in 10 years. You have to have a ‘ratcheting’ mechanism. 20 years ago, a business that had $1,000,000 in revenue was impressive. Today, it is a struggling small business.

The fight is not about main street versus Amazon, it is about Amazon versus the small online retailer

Amazon already is required to collect and pay sales tax in most states under existing law. However, smaller sellers are not required to pay sales tax to states where they do not have employees or facilities. Big online retailers have operations in most states that they serve in order to be more competitive (i.e., deliver on time, etc.). For years, Amazon battled the states not to have to pay taxes, but, because they have acquired so many companies and the states stopped buying the arguement that a contract facility was not an Amazon property.

Amazon means to dominate the world of online business and can only do so if it puts the little guys out of business and increases the barriers to entry. It has found an ally in the state governors after acquiescing to the requirements that they pay tax.

Amazon, whose growth rate is double that of eCommerce in general, clearly does not suffer from a fairness problem. It’s support of this legislation will become exhibit A in their inevitable Anti-Trust suit.

The books have been cooked. This will not help states much with their budget issues

Large businesses already pay sales tax in most or all of the states that they do business in. This is because they have employees or facilities in them. Smaller businesses do not, but, they make up a small part of total online revenues.

The elephant in the room

Finally, let’s face it, sales tax is not fair no matter how you slice it. It is regressive. It requires businesses to take on the burden of tax collection (which should be the governments). Most states will even charge penalties if you fail to file as a business. This means that you may have to pay the state a penalty even if you collected and owe NO sales tax. The system shifts responsibility that should rest on the state to businesses. This favors large businesses with efficient systems for collecting and paying sales tax. Rather than the small businesses where the burden of complexity is a fixed cost.

Rather than finding new ways to complicate our tax system in this country, why don’t we look for ways to simplify it?

One thing you can count on if this bill passes is, articles on how to set up your business to not be affected. Yes, it is full of loop holes!

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