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The Taxman Doth Protest Too Much

It’s a common refrain that those who protest too much might have much to hide.  Wednesday’s introduction of the “Marketplace Equity Act” (MEA) is a prime example of this behavior.  Just like the  Mainstreet Fairness Act before it, the MEA’s name has little to do with its true implications.

At a breathless Capitol Hill press conference, advocates for a new Internet sales tax regime exclaimed the benefits that an ill-defined, expansive and costly regulatory system would have for small businesses.

Not surprisingly, Walmart – a key advocate for online sales taxes and a significant constituent for bill sponsor Rep. Steve Womack (R – Ark.) – ceded the stage to a handful of small business owners who spoke admirably about the creation of a pseudo IRS.

What they failed to address were the glaring shortcomings that this legislation would have for small entrepreneurs trying to expand their customer base by reaching online customers.

When the first streamlined sales tax bill was introduced in Congress a decade ago, it had an exception for small sellers – those with under $5 million in annual sales — recognizing that remote state collection burdens pose a unique competitive disadvantage to small businesses.

Ten years later, state and local tax tax codes are more numerous and even harder to navigate, but this so-called “fairness” measure slashes the small seller exception to just $1 million in annual sales.

For a sense of perspective, the $1 million “small business” level in this proposed bill is:

  •  30 times smaller than what the US Small Business Administration considers a small business retailer
  • 10 times smaller than a recent Treasury Department proposal that regards businesses with less than $10 million in revenue as small businesses.
  • 5 times smaller than all the Internet Sales Tax Bills introduced in the Congress from 2001 through 2008.

Equally disturbing, the big retailers’ bill doesn’t even attempt to simplify many of the complexity issues tackled in the Mainstreet Fairness Act and the Streamlined Sales Tax Project. For instance, the Womack bill has no requirement that states use common product definitions, so California could say granola was candy, while Kansas could regard it as food.

Reps. Womack and Speier would simply trust thousands of state and local tax jurisdictions to engage with businesses in an “equitable” manner.  This is conceivable if you have the accounting resources of a Walmart, but daunting if you’re a small retailer selling handmade jewelry, rare books or confections.

At the end of the day, even if small businesses are facing a challenge from larger online retailers – like Walmart – the imposition of a Wild Wild West tax regime for online sales is not the answer.