Say NO! The Internet Sales Tax is a Bad Tax, is Horrible Policy, is Hostile to Liberty, and Crushes Innovation

Fri, Apr 26, 2013

Job Creation, Taxation

A tax that is so difficult to comply with, so convoluted and complex, that you have to exempt business selling under $1,000,000 from collecting and paying it is a BAD TAX and is BAD POLICY. Let your representatives know you oppose the online sales tax in its current form and that if they levy a tax, every company should have to collect it.

The US Senate is about to vote on a bill deceptively titled“Marketplace Fairness bill of 2013” (S.743) which would create an entirely new tax that requires businesses that sell online to collect and pay sales taxes into every state that has a person make a purchase from that state.

We have read every word of this bill and it is a bad bill.

The bill is unfair, unwise, heavy-handed, detrimental to job creation in the still-fragile U.S. economy, provides awful incentives for small business, and is legally dubious. Proponents of the bill argue that it is about “fairness” and necessary to “level the playing field.” However, the bill purports to relieve one unfairness while merely introducing another, which we’ll highlight below. Also, if the bill were merely about fairness, it would be revenue neutral – but it is not. Instead it establishes a new tax intended to raise additional monies for governments, taking more funds from the already-stretched budgets of all U.S. citizens and using those funds to grow the public sector.

In short, this bill is a tax increase on the American people.

Moreover, it allows any of the 50 states’ tax collecting entities to edit any business from any other state that sells products online. Think about that. Every single state in the union can now perform a costly audit on an online business anywhere in the United States, potentially putting them out of business.

We understand why some feel the “fairness” argument to be compelling. However, there are several reason this bill is not fair.

1. It puts confusing and complex compliance requirements on businesses, and makes them responsible to pay into over 9,000 unique tax venues, even if they are collected by one entity in each state. Most states collect taxes monthly. That would require an online business to perform up to 50 filings each month – 600 tax forms and payments per year in addition to all other tax and regulatory forms and remittances they make!

2. It places significantly more tax compliance burdens on Internet businesses than it does on non-internet businesses. For example, it makes an Internet business in Oregon – a state that has no sales tax, incidentally – subject to audits from tax collectors in all other 49 states. (see section 2.a.i and 2.a.ii of the bill).

3. It disadvantages growing companies and penalizes them for said growth and job creation. In short, it picks winners and losers – with the biggest losers being the businesses that are most helping with job creation and economic growth.

The bill exempts businesses of $1M in revenue or less from collecting and paying any tax at all.

This means that a business with $999K in revenues pays zero tax, while a business with just $1000 more in sales pays $70K in tax.

eBay is currently lobbying to have the limit raised to $10M. If the limit is raised that would mean that any business that crosses the $10M threshold will be forced to impose a $700K cost on customers.

We want to punish growth? Punish success?

We oppose any exemption to the tax, if a tax is levied. It is simply unfair to exempt anyone.

The tax exemptions are actually a disincentive to job creation because they are progressive and punish growth. In fact, for many businesses it will provide an incentive to not just stall, but to shrink.

By moving from $10M+ in sales to $9.9M in sales, a business can capture $700K in cost savings for customers, which would increase a store’s conversion rates and therefore lower marketing costs, so there is an incentive to *shrink* one’s business by closing certain operations, slowing sales, or spinning off parts of the business and therefore pay less tax and make more profit.

This same behavior change will happen at all those businesses selling less than $1M right now. If you are below the $1M mark you’d freeze your growth because a move from $999K to $1M is a $70K punishment. That’s a huge deterrent for small business growth.

Don’t think eBay’s requested exemption is altruistic. By getting the exemption, it would mean that – by our estimates – 99.9% of eBay’s sellers would not pay any tax, so eBay would vastly increase its sales volume and capture a greater share of all Internet sales. Their exemptions request is an effort to capture more sales volume at the expense of other small and midsize online sellers.

Some have argued that an exemption is necessary because of compliance costs. The compliance costs for this bill will be extremely burdensome. But rather than implement unfair exemptions, we feel that any legislation should force state governments to make compliance easy and simple. Any legislation should force states to change their tax codes for online sellers and only require annual payments, and one unified tax rate for all online sales tax. Or, make the sales taxes that would otherwise be owed in other states payable to the home state. Not only would this help with the compliance burden, but it would also allow states to compete on sales tax rate for Internet businesses.

A tax that is so difficult to comply with, so convoluted and complex, that you have to exempt business selling under $1,000,000 from collecting and paying it is a BAD TAX and is BAD POLICY

If the bill is going to pass regardless, one way to deal with the cost of compliance for all businesses would be to exempt the first $1M in sales for every seller. There are some logistical issues that would have to be worked out with such, but that would treat businesses of differing size more fairly.

Or, alternatively, let there be a federal tax deduction – up to a certain reasonable amount – for compliance costs.

But all online sales must be taxed in order to not pick winners and losers nor create adverse incentives.

How can we call a bill “fair” that creates two classes of people merely because one is more successful than the other? This bill hurts all job creators and in fact favors those who don’t create jobs, giving them an unfair advantage.

Replacing one perceived unfairness with manifold others is not right.

In addition to the items we just mentioned, you consider the following negative consequences of the bill, many of which are completely antithetical to liberty:
– The bill undermines States Sovereignty by giving states the ability to levy taxes beyond their own borders.
– The bill creates a situation where there is taxation without representation, putting businesses into jurisdictions that can audit them while keeping those businesses outside representation in that jurisdiction.
– The bill damages consumer privacy by forcing retailers to turn over customer data to state governments.
– The bill hurts healthy tax competition between states.
– The bill faces legal issues regarding due process. (see )
– The bill creates a new definition of a small business, completely out of step with other definitions. For example, the Small Business Administration defines a small business in the online sales industry as $30 million in annual revenue. The Internal Revenue Service defines a small business at $20 million in annual revenue. The Marketplace Fairness bill arbitrarily defines a small online business as having $1 million in revenue.

Let your representatives, and right now especially Senators, know you oppose the online sales tax in its current form and that if they levy a tax, every company should have to collect it.

This post was written by:

- who has written 71 posts on Small Business Against Big Government.

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