By Hamilton Davison There is a move afoot in Congress that will crush the ability of small businesses to compete with big box giants and stifle the growth of electronic commerce. This has nothing to do with head-to-head competition on the basis of quality or price or ease of shipping. Instead, it has to do with a proposed unfair and burdensome new tax law.
Today, there are millions of online transactions every year at more than 600,000 online stores across the nation, but our tax laws haven’t kept up with the times. The challenge has been finding a way to simplify collection procedures that is fair to stores large and small, online and brick and mortar.
Current proposals in Congress, however, make the problem far worse.
The first major legislative scheme to address the problem is called the Marketplace Fairness Act — or MFA — but it is anything but fair.
Why? Because it would imposes huge costs on online sellers, creates complexity and confusion that will force businesses to comply with 9,600 separate tax jurisdictions and also creates enormous risk of intrusive government audit from 46 separate state tax jurisdictions. In essence, it creates a system that only the big box stores and giant e-retailers could love, and it puts tens of thousands of small businesses in very real jeopardy.
Not surprisingly, when members of Congress fully understood the legislation, it was shelved last year. But the lobbyists of the big box stores were not to be deterred.
They have now come up with a second scheme — this one sponsored by Rep. Jason Chaffetz, R-Utah, ironically titled the Remote Transactions Parity Act, which only exacerbates the problems with MFA, and is anything but fair. It essentially forces businesses to sign up for certified software to deal with the tangled thicket of state and local tax laws.
The problem: the legislation remains a dream for the big guys, at the expense of small businesses.
The software, itself, is incredibly expensive to implement. It is estimated that software to manage the complex web of laws would cost between $80,000 to $290,000 in initial setup and integration fees, with another $48,000 to $160,000 in annual upkeep. That’s a huge burden for mom-and-pop stores and other small and medium sized businesses.
Moreover, it does nothing to eliminate the risk of multiple intrusive government audits. Small sellers and start-up companies would be subject to potential audits from states and territories where they have no physical presence and none of the political clout of the big box retailers. And it does nothing to reduce the impossibly difficult challenge of dealing with hundreds of contradictory definitions of what products and services are taxable, and which are not, that emerge when you have to comply with grossly different and conflicting state tax laws.
In fact, the bill encourages a patchwork of state laws to develop, which will further complicate tax compliance for small businesses. Earlier versions of proposed federal legislation included federal preemption provisions and gave jurisdiction to the federal courts to determine whether states were in compliance with the so-called simplification requirements; this latest version leaves state courts with the sole authority to resolve disputes, which only encourages forum shopping, endless litigation and inconsistent state court rulings on the interpretation of federal law.
The bill also gives no relief for catalog retailers whose customers may get it wrong when they self-compute the tax and mail-in their payments. The catalog must make-up any underpayments of tax and must refund overpayments to customers.
The scheme also gives free reign to states to exclude any taxes and products to which they do not want the “minimum simplification requirements” to apply. In other words, a state can choose piecemeal to hop in or hop out of the requirements of the federal law, thereby favoring certain business interests and disadvantaging others. How is this tax simplification, or, using the term Congressman Chaffetz chose for the title of his bill, how is this “parity”?
Simply put the MFA/Chaffetz approach is costly and complex, and continues to tilt the field in favor of the big box stores and their lobbyists.
There is a better path, and the Chairman of the House Judiciary Committee, Congressman Robert W. Goodlatte, R-Va., is developing it. Taxes would be collected where a business is located, as opposed to where the purchaser is located, making the challenge of sales tax collection much simpler. There’s no costly software and doesn’t require sorting through thousands of different tax laws. Perhaps most importantly, audits can only be done by the states in which businesses are located – where they employ people and have a voice in the political process – as opposed to all the other tax jurisdictions in the country.
So — for all the small business owners across the nation — it is high time to make your voices heard about the costs and complexities you would face under Chaffetz’s proposed MFA-fix.
Let’s not give the big stores one more advantage. Let’s create a level playing field where businesses compete on the quality of their products, as opposed to the influence of their lobbyists.
Hamilton Davison is president and executive director of the American Catalog Mailers Association (ACMA), and co-founder of True Simplification of Taxation Coalition (TruST).
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