In early May, 2013 the Senate is set to vote on a bill ironically named the Marketplace Fairness Act. The bill seeks to reverse the 1992 ruling In Quill Corp. v. North Dakota. The Supreme Court ruled that a business would have to have a physical presence in a state to in order for that state to be able to force a business collect sales tax. The court, however, left the doors open for legislation as it stated that congress could enact a law to allow the states to collect tax.
The Marketplace Fairness Act, of which there are multiple versions, seeks to force businesses to collect sales tax in over 20 states across the country. The bill places the burden for compliance on small business. Small businesses like ours have invested significant funds in building and customizing shopping carts. Shopping carts are compilations of code that allow consumers to make a purchase, presumably securely, from an online vendor.
First, in order to comply with the law from at the point of the original sale, most if not all online companies will be forced to either purchase a new cart or create major and costly updates to the existing programming. The issue is further complicated by the fact that even if businesses were to assemble a list of zip codes and tax rates, many areas have two different tax rates within the same zip code –as some areas fall within city limits and others outside the city limits.
After accepting a sale online, the sale needs to be entered into the accounting system of choice by the small business. Much small businesses use ‘out of the box’ solutions from companies like Sage or Quicken. Others use solutions provided by Microsoft. These software products are inherently designed for small, uncomplicated business and they are not, in their present form sophisticated enough to handle the burden of thousands of taxing districts. This means that in addition to having to customize the online software, small business would bear the burden of either customizing their small business accounting package or being forced to upgrade to extremely expensive software packages.
Proponents of the bill argue that certified vendors are being established to handle the reporting. The unfortunate and untold truth is that the vendors come at significant expense and small business still bears the burden of integrating vendor packages with shopping carts and accounting software. Further significant efforts would need to be made to be able to get the data to these vendors in a format they can accept. Proponents also argue that there are some free sources for the information. Unfortunately there are no guarantees that such data is accurate and small business would be forced to absorb the cost of out of state audits and lawsuits.
Colorado, one state which currently qualifies for the program has a 10 page document outlining the various tax rates by city and county. As if that were not enough, the document does not break the tax rates down by zip code and as stated above their can be varying tax rates even within the same zip code.
Another untold, dirty little secret of the bill is that small brick and mortar businesses that occasionally ship out of state will be forced to comply with the regulations as well. From building material dealers to agricultural goods suppliers, this bill could have far reaching and unintended consequences.
Large online retailers such as Wal-Mart and Amazon have convinced many brick and mortar small business owners that this bill is about being fair to small business. Nothing could be further from the truth. The truth is that the large online retailers already have a nexus of influence in many states and they are already required to collect taxes. Aside from the fact that additional regulations and reporting mandated from the federal government are rarely a good idea or beneficial to small business, clearly one has to question the motives of the large retailers involved. In truth, since when has a company who cuts the hours of its staff to avoid benefits and relies heavily on cheap products from overseas concerned about marketplace fairness? Further, unfortunately, many small business owners do not realize that while the overhead associated with an online store is different than that associated with brick and mortar, the online business community frequently has overhead equal to or exceeding that of a brick and mortar shop alone. Assuming sales of $1,000,000 annually at a 5% net after expenses, many of the small business caught in this bill would have an implementation cost that is higher than annual profits.
Further, anyone who has studied basic economics can tell you the far reaching effects of the chain reaction that will be set off by this bill. Many American manufacturers rely on the business generated by ecommerce and mail order companies. As ecommerce companies and mail order companies suffer at the hands of overreaching regulation it will directly affect the manufacturing and shipping industry in this country as well.
While generally speaking we oppose the bill, if it is going to become the law of the land, some basic improvements to the bill need to be made to shift the costs of enforcing the bill from the small business owner to the government who stands to benefit from the bill.
- Each state shall compile a CSV file listing the total tax rate by ZIP code. Each ZIP code may have only one tax rate. The CSV files shall be made public on the states website and updated quarterly in a single time frame by all states. The Federal government shall compile all csv files into a single CSV file. The CSV files will list the State, County, City, Zip Code and tax rate and a single format shall be followed such that it can be universally imported.
- The federal government shall specify a single format reporting system where businesses upload a sales spreadsheet in a predetermined CSV format. The upload is then compiled by the Federal government into reports which are sent by the federal government the taxing authorities.
- A single site for all downloads should be established as specified above and the same site shall provide a single registration process that registers the business in all participating states AND exempts them from being charged sales tax in same states on items purchased for retail.
- Penalty & Interest forgiveness for small businesses for the first two years in all states other than their home state for unintentional reporting errors or omissions.
- 1% fee of taxes collected to the Federal Government and 10% vendor fee to the small business when the business pays the collected taxes on time.
- Prior to the effective date of the law, the Federal government shall develop and distribute free of charge modules for the major small business accounting software’s such as those made by Microsoft, Sage and Quicken and the common shopping carts such as Magento, OSCommerce, etc used by small business. The modules should be open source and well documented so that manufacturers of other carts may integrate them into their systems.
- A free federal website where a business can enter a zip code and have the sales tax rate returned.
- As proposed by E-Bay the threshold for a small business should be increased to no less than $10,000,000Â
- The law should not be enacted for at least 1 year after passage with a provision for voluntary compliance after 3 months.
To be clear, we oppose the bill and we think it is dangerous overreach by our government. No matter how the bill is enacted it will be painful. At minimum, changes like this can turn the bill from a job killer to an inconvenient overreach.
Follow the argument on twitter @garflooringllc & #MarketplaceFairnessAct
Justin Krauss
President
Garage Flooring LLC
