This Tax Proposal Could Be the Largest Obstacle to Growing Small Businesses Online

Dealing with federal, state and local taxes and regulations is already an incredibly burdensome task on startups and small businesses. But beyond complying with onerous regulations from the jurisdiction where businesses operate, there is a little talked about potential tax change that could make it much more difficult for small businesses to expand into the online marketplace. This complication is known as the Marketplace Fairness Act or MFA.

Right now, traditional “brick-and-mortar” stores are required by states and localities to collect sales taxes from customers and remit those back to the states. This is because they have a physical presence in that state and locality. When companies sell goods online, customers from other states are generally responsible to report and pay the taxes they owe in the jurisdiction in which they live; this is called a “use tax.” The Marketplace Fairness Act would require businesses selling products online to collect and remit taxes to the jurisdiction where the customer is located. While this proposal might sound like a good idea, there are some major problems with setting up this kind of tax rule.

First, this would require online retailers to potentially collect and remit sales taxes for 9,998 different sales tax jurisdictions, which, absent major simplification, would unnecessarily burden businesses engaging in interstate commerce. . Each of these jurisdictions might have different rates, exemptions, rules, tax holidays, or other differences that online retailers would be forced to keep track of or face the risk of costly audits and fines. Another problem with the MFA proposal is that it would allow state tax collectors to reach across their boundaries to collect taxes from non-resident online retailers located outside of their jurisdiction. These retailers could face fines or legal challenges from taxing jurisdictions based on rules in which the online retailers have no voice.

In addition to these objections there are five states that would be hit the hardest by passing the Marketplace Fairness Act. Alaska, Delaware, Montana, New Hampshire and Oregon do not levy a statewide sales tax of any kind. The businesses and residents of these states have made the choice to live, work and start businesses in these no sales tax states. But under the Marketplace Fairness Act, businesses that are not equipped to handle even one sales tax jurisdiction will be faced with nearly 10,000 to comply with. This would require setting up collection and remittance processes that the business currently does not employ. This would be a major obstacle for using the internet to grow a small or new business, especially because MFA doesn’t even include any of the simplification measures a previous proposal, the Streamlined Sales Tax Project, at least had attempted to resolve.

Because of these numerous problems with the Marketplace Fairness Act it is no surprise that most Americans do not like the idea. A multi-state poll conducted by the National Taxpayers Union and the R Street Institute found that voters oppose allowing tax enforcement agents from one state to collect taxes from online retailers based in a different state by a margin as high as 26 points.

Proponents of the Marketplace Fairness Act sometimes claim that they are only hoping to treat online retailers the same as traditional “brick-and-mortar” retailers, but this claim simply doesn’t hold up. In fact, rather than treating all businesses the same, MFA ensures that online and “brick-and-mortar” retailers are treated differently by overturning the “physical presence” precedent and setting up two distinct sets of rules for the collections and remittance of sales taxes.

Forcing online retailers to make the choice between overly onerous sales tax compliance rules of MFA or foregoing the potential customer base that the Internet allows access to is fundamentally unfair. The debate will certainly continue on the national level about the so-called Marketplace Fairness Act, but in reality the MFA could be the most destructive impediment to growing online retailers and small businesses that were hoping to use the online marketplace to grow and succeed.

In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure…

+ Cronyism In Depth