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How Internet Sales Tax Would Destroy Small Online Businesses

It’s said that the road to hell is paved with good intentions. Like many proposals put forth in the last several years, the Internet sales tax bill (titled the Marketplace Fairness Act) currently working its way through the Senate is loaded with good intentions based on the idea of “fairness.” In reality and practice, the bill would end up like many liberal projects: a disaster for small business owners.

Think about those who run a business out of their home, a small shop providing products to a niche market of consumers. When an order comes in, the owner is the sole point of contact: they play the role of cashier, customer service, production and shipping. Despite the truly small nature of their small businesses these individuals would be forced to hire accountants or learn, track and charge the appropriate sales tax for each state in which a customer resides. They are faced with a choice: either spend a significant portion of their profit on an accounting professional, or spend a significant amount of time managing their own finances. A potential third option, only selling products to a select number of states, would be equally destructive for niche businesses that only survive by selling nationwide. 

A number of Republican senators, including Mitch McConnell and Marco Rubio, have come out against this bill and are joined by Democratic senators from no-tax states like New Hampshire, Montana and Oregon, despite President Obama’s support. Influential groups like the Heritage Foundation and its lobby arm Heritage Action for America are against the bill. Today on the Senate floor McConnell affirmed that the viewpoints on the bill aren’t falling along traditionally partisan lines while explaining his opposition:

For me, the issue boils down to that fact that the legislation we’re considering would create an enormous compliance burden for a lot of small businesses out there, making them tax collectors for thousands of far-away jurisdictions. Just as importantly, this legislation would increase the tax burden on Kentuckians. And as I’ve said before, I don’t think the people of Kentucky sent me here to help them pay higher taxes. Brick-and-mortar companies complain about the inequity that exists in current law, where their customers have to pay taxes that online shoppers do not. And I am sympathetic to that concern. But by imposing this new Internet Tax, states would suddenly be empowered to force online retailers to simultaneously comply with all the different tax codes of all the states in which their customers reside. That’s no small feat. From what I’m told, there are nearly 10,000 state, local, and municipal tax codes nationwide. And while complying with so many codes might not be a big deal for large online retailers, it’s a huge burden on the little guys. So small businesses owners are worried, and justifiably so.

While many online-only retailers do enjoy an advantage over “brick-and-mortar” stores who charge sales taxes, the cost of compliance with the tax code is far less cumbersome for stores that only need to comply with the sales tax of the locality in which they operate. If small online business owners are forced to comply with every single state, local and municipal tax code in America, they would be put at a distinct disadvantage, not on a level playing field. 


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