Here’s a solution that most people on either side of the issue won’t tell you…the whole issue of collecting sales tax on internet sales can be solved without hurting small businesses. My simple solution?
Have all larger internet retailers that sell $20 million or more online collect sales tax.
You might ask, “won’t that leave a pile of money on the table?” The simple answer is no. If you want the complicated answer, read on.
The proposed Marketplace Fairness Act does not create a level playing field, but rather just picks new winners and losers. For instance, under current international trade agreements, the individual states do not have the power to require foreign companies shipping from outside the USA to collect tax on individual transactions. Due to the reciprocity agreements with the USPS, foreign retailers would have a natural price advantage with US retailers pushing more business and more jobs offshore.
Additionally multi billion dollar companies like Amazon.com would have a HUGE competitive advantage over small businesses like ours because they have the volume to amortize costs of collecting and reporting tax to 50 different states. Within some of those states, multiple taxing jurisdictions exist- Alabama alone has 49 separate reporting authorities (http://1.usa.gov/106Jdzb). According to the Washington Post, a minimum of 7,600 different tax rates exist and some estimates top 14,000. The reason they can’t give us an exact number? There were 259 rate changes alone in 2012. (http://wapo.st/14MxEQu)
There is a $1 million dollar exemption in the Marketplace Fairness Act for small businesses but that exemption is laughable. Any small business can tell you that if you are internet based and have less than $1 million in sales, you are not a business but rather a hobby. Since margins are typically small with online businesses and since large businesses like Amazon make up the vast majority of online sales, a more reasonable exemption would be along the lines of Internet Retailers Top 500 list (http://bit.ly/106K2bd). For 2013, the last member of the Internet Retailer Top 500 had $21,375,000 in sales.
These Top 500 retailers comprise over 97% of all 2013 online sales (latest published year) so assuming an average sales tax rate across all jurisdictions of 7%, states would collect nearly $18 BILLION in uncollected sales taxes if the cutoff was being a business the size of a member of the Top 500 retailers, the only cost to states would be roughly $10 million per state in uncollected sales tax and would save numerous jobs from retailers that will simply be put out of business due to compliance costs associated with collecting sales taxes in a myriad of jurisdictions. See individual sales tax rates here http://bit.ly/106L4UC.
In summary, the proposed Marketplace Fairness Act will:
1. Place a heavy burden on tiny businesses that will close companies and cost jobs.
2. Unfairly take from small businesses and give to the giants like Amazon.com (that’s why Amazon heartily supports the proposed Marketplace Fairness Act).
3. Collect an amount from small businesses so tiny that it is a rounding error in most state budgets.
What should be done:
1. Pass a bill that exempts businesses with less than $20 million in online sales.
2. Collect between 97% and 98% of sales tax that should be collected.
3. Quit trying to steal from small businesses and give to big businesses!
Using California as an example, their budget for 2014-2015 is $156 billion (http://wapo.st/1FZTZIC). If companies less than $20 million in online sales were exempted from collecting online sales tax, California would collect over an additional $2.3 BILLION in sales tax and would only lose less than 1/2 of 1% of the state’s total budget and small businesses would be SAVED from a punishing compliance burden.