The Effects Of Internet Sales Tax for Small Businesses

Money in the Hand

The Internet has shrank the globe to the point that even the tiniest businesses can draw customers from every corner of the world. All you needed to have a successful online business was a reliable Internet connection, a Web site (or an eBay or Etsy store), a decent product, good marketing plan and a local post office. But the face of Internet marketing could be changing forever if legislation currently making its way through Congress requiring businesses to collect state and local taxes on Internet purchases is enacted.

The United States Senate recently passed a bill that would require Internet retailers with more than $1 million in annual out-of-state sales to collect and remit state and local taxes, based on their customers’ addresses. The bill, called the Marketplace Fairness Act, seeks to level the playing field between bricks and mortar stores (who are required to collect state and local taxes) and Internet retailers. In the past, Internet sellers have only had to collect tax if they had a physical store or warehouse within their customers’ respective state.

Though the Marketplace Fairness Act easily passed in the Senate, it’s likely to face more opposition in the House of Representatives, according to the Los Angeles Times. Bob Goodlatte (R-VA), and head of the House Judiciary Committee, is one of the many Congressmen who have problems with the bill. Even if the bill becomes law, it likely will be challenged in the U.S. Supreme Court, where there is a precedent against such legislation. The court ruled in the 1992 case of Quill Corps. vs. North Dakota, that forcing retailers to collect sales tax in states where they do not have a physical presence constitutes an undue burden on the individual retailers and on commerce in general.

Bill Could Change Internet Marketing

The prospect of collecting up to 45 state taxes and an estimated 9,600 municipal taxes is overwhelming to most online retailers. According to the New York Times, many online sellers fear the complexities of collecting and remitting all of these individual taxes will put them out of business. It’s a burden that a one or two-store brick-and-mortar competitor that collects only one state and one or two local taxes doesn’t have to worry about. Five U.S. states, including Delaware and Montana, have no state sales tax which would further complicate matters. If the proposed bill becomes law, it would force online retailers in those states to collect other state taxes, even though their home state has none.

One of the provisions of the new legislation is that states would have to provide retailers with software to make it easier for them to collect and remit the necessary taxes. However, there would be nothing easy about trying to interface 45 different sets of state software. The money small business owners currently save by using time-saving measures like resource scheduling software will likely be negated if this bill is enacted.

The Bottom Line

It’s a good bet that there will be no firm decision on the Marketplace Fairness Act any time soon, despite the Senate’s hearty endorsement. If such a measure should pass, it will almost certainly change the way online retailers do business and very well may increase online prices and reduce competition.