Internet tax law could create challenges for small businesses
Marketplace Fairness Act would require sales tax for all states you ship to
By Elaine Pofeldt | Published: July 12, 2013
If the Marketplace Fairness Act passes in the House, running a small Internet store could get a lot more complicated. Online retailers could eventually be required to collect sales tax for every state they ship products to -- a process opponents call daunting, despite measures intended to ease the burden for businesses.
The bill, which passed the Senate May 6, would give states the authority to require out-of-state online retailers to collect and remit sales taxes to a customer's local and state government.
Under the current system, an Internet company has to collect taxes only in states where it has a physical location. For most companies that means the state in which it has its headquarters. The burden is on consumers to pay sales tax and "use tax" when they file their income taxes, but few do.
Not all retail sales will be affected if the act becomes law. Companies that make annual out-of-state sales of $1 million or less would be exempt, and only states that have simplified their sales tax laws would be able to make a retailer collect the taxes.
Leveling the playing field
Supporters of the bill say it would take away an unfair price advantage that many Internet retailers have enjoyed over brick-and-mortar competitors, and that it would get billions of dollars in revenue to the states. Jeff Stibel, CEO of D&B Credibility, says he believes the law will make it easier for local businesses to compete with big online retailers. "I'm actually encouraged and excited about it," he says. "I think it will get people to act and think a lot more 'local' again."
I think it will get people to act and think more 'local' again.
|-- Jeff Stibel
CEO, D&B Credibility
But many small businesses are not so excited about leveling the field. They say the vast majority of online sales come from large businesses such as Amazon, but smaller etailers that are less threatening to traditional merchants will suffer most from the costs of compliance with the act.
Shabbir Nooruddin runs FishFinder Source, a fledgling Internet store based in Chicago that sells digital devices to help fishermen locate their catch. Along with announcing it offers free shipping, his site says, "We don't collect any sales tax, either." Nooruddin says it's one of the few ways he can get an edge when competing against big retailers such as Bass Pro Shops and Cabela's. "I'd lose a lot of my sales if I had to charge sales tax," he says -- though his one-person business is too small to be affected by the law.
9,600 sales-tax jurisdictions
Businesses that will be affected have a lot more to think about. The Tax Foundation, a nonpartisan research organization, estimates there are more than 9,600 sales-tax jurisdictions in the country. Each one has different compliance rules, not just on rates but on what's even taxable. "I think it's going to be a big burden on small businesses," says Peter Stathopoulos, a state and local tax lawyer at Bennett Thrasher, an Atlanta CPA firm.
For an idea of the complexity that small Internet retailers face, consider a hypothetical clothing store in Michigan that sells $200 business suits online. If the shop sells a suit to a customer in Massachusetts, the owner will have to charge taxes on $25 of the price, but the balance will be sales-tax-free, thanks to a Massachusetts exemption that applies to clothing purchases up to $175. If the consumer decides to add a briefcase to the purchase, its full purchase price will be taxable. However, if he throws in a pair of socks, that will be tax exempt.
Of course, it's unlikely that the retailer will only market to customers in Massachusetts. If, say, the retailer also sells a suit to someone in Delaware, he'll have to know the rules of that state -- which also happens to exempt clothing from taxes.
Merchants will face added paperwork too, according to Stathopoulos. Under the law, they will need to keep track of tax exemption certificates for customers such as out-of-state hospitals and schools. What's more, merchants could be subject to audits by 50 states. "An audit is a long, time-consuming process," he adds.
Some companies are worried about remittance as well. Bob Shirilla and his wife JoAnn run two Canfield, Ohio-based Internet stores: Simply Custom Bags, which sells tote bags; and Keepsakes Inc., a seller of items such as sympathy gifts. According to Shirilla, the businesses' revenues are close to the level where he could be subject to the law. Shirilla's big worry is not about the actual collection process -- he believes that will be relatively easy to manage through the Yahoo platform he uses for the stores. "It's paying and dealing with the states to give them the money," he says. "How do I get that money to the state?"
States must simplify
Concerns could partly be alleviated by provisions in the act to ease the burden on businesses, including requirements on states that participate to simplify their sales tax rules. States could either do that on their own, or by becoming a full member of the Streamlined Sales and Use Tax Agreement (SSUTA).
SSUTA is a voluntary multistate agreement to simplify sales tax rules and collection practices through measures such as uniform tax definitions, simplified tax rates and state funding of the administrative costs of sales tax collection. SSUTA member states pay the costs of sales tax software from six providers certified by the SSUTA Governing Board.
Big players have advisers. They have a lot of people they can pay to take care of things. Small players have to do a lot of this legwork themselves.
|-- Paul Gevertzman
Anchin, Block & Anchin
Currently there are 22 full members of SSUTA, meaning they have enacted laws in compliance with the agreement. If the Marketplace Fairness Act passes, online retailers could have to collect taxes on all sales shipped to those 22 states, starting as early as Jan. 1, 2014. Collections will be delayed for two other states that are considered "associate members" of SSUTA, because the laws required to implement it haven't yet taken effect.
States outside SSUTA could still require sales tax collection under the act, but they would need to simplify tax laws and provide free software for managing sales tax compliance. Like SSUTA member states, they would also have to relieve the retailer of liability for errors resulting from state-provided information or software.
Free, not necessarily easy
According to the bill, the free software is supposed to calculate the taxes due, file the returns and update to reflect tax rate changes. SSUTA-certified software firm FedTax, for instance, offers software called TaxCloud that calculates sales tax for all 50 states and automatically files returns for the 24 Streamlined States. It is available on 17 e-commerce platforms, including Salesforce and PayPal Express Checkout.
FedTax is negotiating to provide TaxCloud through more platforms, which will make compliance easier for many merchants, says Daniela Saunders, senior vice president of sales and marketing. "As far as the concerns people are having, I think a lot of this is getting solved, especially given that most people are using these standard platforms," she says.
Stathopoulos warns that, free or not, the software may not be so easy to get up and running. When working with big companies that already use sales tax automation software in their Web stores, he's found that implementation is often bumpy.
He anticipates there might be challenges in getting the software to work with companies' accounting systems and predicts that a small merchant with customers around the country could face "tens of thousands" of different compliance costs, ranging from accounting fees to technology expenses.
In for the long haul
Complying with the law, if it passes, won't be a one-shot process, according to Paul Gevertzman, partner in accounting firm Anchin, Block & Anchin. When tax laws change, small firms will need to be prepared to adjust, he says.
"Big players have advisers," says Gevertzman. "They have a lot of people they can pay to take care of things. Small players have to do a lot of this leg work themselves."See related: 1099-Ks: Small businesses face new tax paperwork, penalties
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