The Color Purple in Congress

Sometimes in politics calmer heads and common sense prevail, and red and blue partisans merge into purple. Protecting and encouraging Internet entrepreneurs has been known to move Congress in this way.

Today, a House Resolution offered by Representatives Dan Lungren (R-CA) and Zoe Lofgren (D-CA) will put States on notice that this Congress won’t impose any new tax collection burdens on the nation’s small online businesses.

Their west coast, bi-partisan resolution picks up on a similar resolution by Rep. Paul Hodes (D-NH) in the last Congress. Rep. Hodes hailed from a small, east coast state with no sales tax, while Reps. Lungren and Lofgren come from California, a state with a high sales tax and a huge budget shortfall. Yet all of them see the risks of forcing new tax collection burdens on the smallest of businesses that use catalogs or websites to serve their customers.

Lungren’s resolution is titled “Supporting the Preservation of Internet Entrepreneurs and Small Businesses.” Its main point is this simple pledge:

Congress should not enact any legislation that would grant State governments the authority to impose any new burdensome or unfair tax collecting requirements on small online businesses and entrepreneurs, which would ultimately hurt the economy and consumers in the United States.

This resolution is a preemptive stand against a handful of states that wants Congress to override Constitutional protection against unreasonable burdens on interstate commerce. These state tax administrators call their campaign the “Main Street Fairness Act” and claim that small business needs to be protected from the Internet.

But hang on. ‘Main Street’ small businesses have been getting clobbered by Wal-Mart and big-box stores – not by the Internet. In fact, Main Street is learning that the Internet is their best hope for finding low-cost supply and finding new customers around the world.

So what would the Main Street Fairness Act and its Streamlined Sales Tax (SST) really mean for a small business that’s finding new customers online? Even SST advocates acknowledge that their new nationwide tax regime will be hard on small businesses. That’s why initial SST legislation exempted anyone with less than $5 million in annual remote sales. But a growing appetite for new tax revenue has prompted SST leaders to shrink their small seller exemption to just one-tenth that level, with a stated plan to eliminate it entirely:

The exemption threshold shall be set at a relatively low level and over time adjusted downward so that only sellers making isolated or occasional sales are excluded from the collection requirement.

Their plan to eliminate small business protection is no secret, given that SST is managed by tax collectors whose goal is to maximize tax revenue. While they pay lip service to reducing tax and compliance burdens, their hearts just aren’t in it. For instance, the SST judiciously uses the term ‘small seller’ instead of ‘small business.’ So where we see a small business creating jobs and wealth, tax administrators see just another possible tax collector.

What costs would a small business face if Congress disregarded the Lungren Resolution and forced them to collect for all states? The SST Cost of Collection study found that a small business (under $1M) spends 17 cents for every tax dollar it collects for states. And even if SST software works as promised, that only helps with 2 cents of the 17 cents in costs per dollar collected. That leaves small businesses with a 15% cost burden on every dollar they collect, for things like:

  • Paying computer consultants to integrate SST software into home-grown or customized software;
  • Training customer support and back-office staff;
  • Answering customer questions about the taxability of items, or sales tax holidays in remote jurisdictions;
  • Handling audit questions from 46 states; and
  • Paying accountants and computer consultants to answer all these questions!

These collection burdens will be a big problem for small catalog and online businesses who collect only their home-state sales tax today. Ask any small business, on Main Street or online, and you’ll learn it’s hard enough to collect sales tax for one state, let alone all 46 states with sales tax laws of their own.

With a full picture of what small online businesses would face from SST it’s easy to see why Rep. Lungren and his colleagues want to protect our nation’s Internet entrepreneurs.

Small businesses really need the protection, especially now that big retail chains are supporting SST.  Why would they, you ask?  Because big retailers now have expansive web-stores of their own and give customers the convenience of doing pickups and returns at their local stores. These chains use plenty of local public services wherever they have stores, so it’s only fair for them to collect sales tax in all their states – as required under current law.

But a small business can’t even dream of opening stores in every state to match the big retailers and their multi-channel convenience. It’s yet another disadvantage for small business, who already pay higher rates for things like shipping, inventory, IT services, and health insurance.

Ironically, the SST is good news for big-box retailers with websites. After all, even a smidgen of simplification helps when you already have to collect tax in every state. But SST will undoubtedly raise costs and prices charged by small businesses that try to compete with the big boys.

From the left side of the political aisle to the right and from small states to large, there is broad support for maintaining the current Internet ecosystem that provides new opportunities for entrepreneurs and produces the world’s most innovative companies.

Representatives Lungren and Lofgren are to be commended for their leadership in securing a successful Internet economy. And for demonstrating that collaboration for a good cause sometimes still happens in our nation’s Capitol.

–Steve DelBianco

3 replies

Trackbacks & Pingbacks

  1. […] shipping, inventory, IT services, and health insurance.  Congress recognized this disadvantage and twice proposed exempting small businesses from new requirements to collect remote sales […]

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply