Internet Sales Tax: It’s Bad for Small Business.


I'm not going to get into the nitty-gritty specifics of this "Internet Sales Tax" proposal. I'm still holding out hope that it never comes to fruition. But I feel the need to respond to a few specific arguments I've seen floating around the internet claiming that the opposition to the proposal is overblown.


Internet Sales Tax – Burdening entrepreneurs and small businesses: Why a $1 Million exemption sounds reasonable, but isn't.


Argument #1: People are already required to pay use taxes, this just makes it easier for the government to actually collect the tax from consumers. 


So, the argument goes, a consumer is actually spending *less* by buying the same Macbook Pro at bestbuy.com. Because he's going to pay his use taxes, right??


This point seems fair enough at first blush. Very few taxpayers actually go through the trouble of figuring out what use taxes are due on the purchases they make. It's incredibly burdensome. But has anyone thought this argument through? Here are the basic steps to reach to the conclusion that an internet sales tax is an acceptable solution to this "problem":


  1. People aren't paying the taxes they are required to pay
  2. Government enforcement of this widespread noncompliance would not be cost-effective
  3. Brick-and-Mortar businesses already collect sales taxes
  4. Collection of Sales/Use Taxes should be outsourced to businesses
  5. It's fair to make businesses take on the role of tax collector


Let's think about this for a minute. There is already a law in place that requires the tax to be paid. The problem is that no one is following the law. How is this solution fair? I'm not going to argue that state governments should implement insane FBAR-style penalties for noncompliance with Use Tax reporting. But if there was some sort of serious risk to taxpayers, maybe they would think twice about cheating on their taxes in this way. The problem is that state governments haven't even made an effort to enforce the laws that are on their books.


Instead, they are asking the federal government to find a solution to this "problem" and the federal government is looking to shift that burden directly on to the shoulders of online businesses. What's going to happen when a business screws this up? All of a sudden the government is seizing their assets and holding them responsible for failing to do something that is essentially the job of the state government where the consumer lives. Not cool if you ask me, not cool at all. The reason the federal government needs to pass this law in the first place is because the courts have told the states over and over again that they do not have the power to force out-of-state businesses to collect sales taxes for them.


Argument #2: There is a "Small business exemption".


The Huffington Post makes the general argument here:


Donohoe's argument — also laid out in an email to more than 40 million of his site's users— misses a key point: Businesses that generate less than $1 million in out-of -state revenue are exempt from the law. For his part, Donohoe is pushing to raise that ceiling to $10 million.


Hahahahahahaha…really? What do you consider a small business? I think this article misses a key point: a business' revenue tells you nothing about the size of the business. A much better measure of the size of a business is its annual profits or the size of its operations. So, what do you consider a small business? Are we talking a business that makes $50,000 a year? $100,000 a year? Is a one-man operation who successfully makes $50,000 a year on the internet as a middle-man between a wholesaler and a consumer a small business? If you go by this kind of exemption to decide who is a small business, perhaps he is not. It's possible that this one-man operation only marks up his product 5% before he sells it on eBay. Maybe he marks it up 10%, but the fees that eBay charges him cuts into that profit. At the end of the day, he's going to have some overhead. Thing is – he won't be classified as a small business just because he's making small profits. This "exemption" is based on $1 Million in gross sales or less. 


Let's say a one-man reseller messes up and doesn't collect Internet sales tax when he's supposed to. If he's only making 5% over wholesale, he's screwed! He's going to be held responsible for the tax he didn't collect (because it's easier for the government to go after him instead of the end consumer), all of his profits are going to be wiped out. Even if he complies, that will cost him money. The internet sales tax is going to discourage small-time US-based resellers from doing business on the internet. Alibaba sellers will be jumping for joy if this bill passes. And Amazon will need to do more than check your cookies to see if you're shopping around for it to undercut its competitors…..

Funny how Amazon's price changes after I checked bestbuy.com. So without breaking the law, the same Macbook is the same price at Best Buy and Amazon. Soon they'll both need to compete with foreign sites that still won't be required to collect tax.


By the way, what happens if sales taxes aren't collected, but the consumer actually complied with his legal obligation to pay state use taxes? Who's going to be there to make sure that governments aren't being unjustly enriched by collecting essentially the same tax twice? I don't think people who say the internet sales tax is no big deal really understand what a mess this is going to create for internet-based businesses.