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Proposed e-Commerce Legislation Threatens Online Retailers

Proposed e-Commerce Legislation Threatens Online Retailers Credit: Dreamstime.com

What three senators are calling the Marketplace Fairness Act has small businesses owners and online retailers crying foul. The recently proposed bill gives states the authority to collect sales taxes from online retailers provided they have more than $500,000 in remote sales annually. This bill, which is co-sponsored by Sens. Dick Durbin (D-Ill.), Mike Enzi (R-Wyo.) and Lamar Alexander (R-Tenn.), would change the current system in which taxes only need to be collected from consumers if a retailer has a physical location within the state.

According to the Marketplace Fairness Act, the aim of this new legislation is, "to restore States' sovereign rights to enforce State and local sales and use tax laws, and for other purposes." For small business owners, however, the law would mean having to collect and remit sales tax to every state in which their customers reside. For most small business owners, this would require expensive and complicated tax filings that could, realistically, only be handled by an accountant.

"This legislation would require businesses with remote sales of more than $500,000 to collect state sales tax in each state that business has a single customer," said Todd Thibodeaux, president and chief executive officer of CompTIA, a nonprofit trade association specializing in information technology that is speaking out against the proposed legislation. "This unrealistically low threshold would create a complicated and costly compliance burden for small businesses. It would discourage small businesses from pursuing interstate commerce opportunities at a time when business activity should be fostered and encouraged. The $500,000 exemption is simply too low."

Under the bill, businesses that have a single customer in any of the 50 states would need to pay the state sales tax in the state where that customer resides, thereby requiring small businesses and online retailers to file a tax return in each of those states where a purchase is made. This requirement could have a large financial toll on businesses as they will need financial guidance from tax professionals in order to file these numerous tax returns. While the act claims to protect small businesses with less than $500,000 in sales, the law in fact may have the opposite effect as many small businesses generally exceed the $500,000 threshold annually.

"We understand the need of states to address revenue collection based on legitimate sales taxes," said Thibodeaux. "However, we must balance the states' authority to require businesses to collect foreign states' sales taxes with the compliance burdens that would be foisted onto small businesses.  These additional compliance costs to small businesses would have a negative effect on employment and economic growth."

Not surprisingly, accountants and tax professionals have come out as supporters of the legislation.

"The Marketplace Fairness Act will finally bring sales tax laws up-to-date with e-commerce," said David Campbell, CEO and co-founder of FedTax, a sales tax management service. "It grants almost immediate collection authority to the majority of sales tax-collecting states while providing clear and easy-to-follow guidelines for the remaining states to simplify their sales tax laws."

Internet retailer eBay, however, disagrees with that side of the argument, saying that the bill will be a detriment to online retailers and small businesses if passed.

"This is another Internet sales tax bill that fails to protect small business retailers using the Internet and will unbalance the playing field between giant retailers and small business competitors," said Tod Cohen, vice president for government relations and deputy general counsel at eBay, in a statement posted on the eBay Main Street page. "It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity."

The National Retail Federation (NRF), which includes many of the nation's largest retailers among its members, supports the proposed legislation.

"The NRF supports the Marketplace Fairness Act," David French, chief lobbyist at the NRF told BusinessNewsDaily. "We believe the bill is an important step towards leveling the playing field between online retailers and brick and mortar retailers. There are some important simplification steps that states will have to enact which will be good for online retailers and small businesses. We think that is a step in the right direction." 

 "The bill would also require states to provide software for businesses to use in order to track and remit their sales tax obligations," said French. "In that regard we think the legislation addresses the concerns of its opponents. There are a lot of folks out there that don’t want to comply and don’t want to collect sales tax on their sales. If you were a brick and mortar store you would be collecting sales tax on your first dollar in revenue not after $500,000 in remote sales.  There is an equity argument that is overlooked right away when some online retailers complain about the burdens. These burdens are faced by every brick and mortar store everywhere."