A triumvirate composed of cash-hungry state legislatures, "Big Retail" led by Walmart and Amazon, and sales tax software providers have coalesced around support for the Marketplace Fairness Act (MFA) and have small online retailers in their crosshairs.
The MFA would compel small online sellers like me to become unpaid tax collectors for states where we have no physical presence, no representation, and no voting rights.
It imposes huge compliance costs on us and makes us vulnerable to expensive and time-consuming tax audits from 46 states, six territories, and over 500 Native American Tribal Nations.
State governments say that if the MFA passes they’ll collect an additional $23 billion in revenue. The truth is that most of that $23 billion is already collected.
According to James Gilmore III, the former Chairman of the Congressional Advisory Commission on Electronic Commerce, 83 percent of online sales are made by big box retailers, and, therefore, collecting tax. Moreover, the remaining 17 percent of those online sales (less than 1 percent of total retail sales) are taxed through state use taxes, but the states usually choose to not collect them.
Big Retail says this law is necessary to “level the playing field” and has worked hard to convince small brick and mortar mom and pops that the Big Box down the street isn’t putting them out of business, but rather small online sellers are. Online small businesses are not at odds with small brick and mortar stores. In fact, many of us are hybrid businesses that sell both online and in-store and started selling online to survive when Walmart or Home Depot moved in down the street.
The states say they’ll provide online sellers with “free” software to help them handle the enormous compliance burden. But software doesn’t integrate itself and integration is expensive. Moreover, the software is inflexible and inadequate.
For example, it doesn’t handle multi-channel selling, an absolute necessity for online sellers. It also doesn’t integrate with many order management systems or common accounting programs, forcing us to pay for expensive upgrades. In fact, compliance costs to small online sellers range from about $20,000 to $300,000 in the first year, and remain high in the following years. For some of us, these costs are higher than our annual profits and could put us out of business.
Then there are the coming audits. Audits are time consuming, costly, and stressful. Most audit penalties result from judgment calls made incorrectly or other honest mistakes. We printed out the tax rates and exemptions we’ll have to learn and know it was 811 pages and was confusing and contradictory.
Many sales tax laws make responsible parties, not businesses, liable for tax bills, penalties, and interests, so an honest mistake and a resulting unfavorable judgment could personally bankrupt some sellers.
We’d be regulated without representation. To whom would we turn for help if a remote state follows recent IRS patterns and subjects us to an abusive audit? Who is our representative who could help protect us? No one.
Senator Jeff Flake and Representatives Matt Salmon, David Schweikert, and Ann Kirkpatrick have been principled and aggressive opponents of the MFA. Representative Trent Franks also sees that the bill is flawed.
I recently met with Mesa Mayor Scott Smith, president of the U.S. Conference of Mayors that is aggressively lobbying for the MFA because it sees it as a way to increase municipal tax receipts. We are hopeful he will also oppose the MFA. It would be wise.
According to a recent Gallup poll, a large majority of American adults oppose the MFA, including 73 percent of adults between the ages of 18-29.
Continuing to push for the MFA as it now stands not only threatens small businesses everywhere but it also puts politicians at odds with those they have been elected to represent.
Drex Davis is a co-owner of Mesa’s Scrapbook.com and co-founder of the eMainStreet Alliance, a grassroots organization consisting of more than 650 small, online retailers. Connect with him at eMainStreet.org.