Interest is growing in requiring all remote sellers to collect and remit sales taxes for products and services sold from State A to State B. For a number of years, states have been concerned over the loss of revenue resulting from their inability to enforce payment of use taxes by residents who purchase products and services from an out of state vendor. The solution around which most are rallying is to require out of state sellers to collect and remit the applicable tax, even if that business has no connection to the state, such as a building, distribution center or employees.
Now, it certainly seems fair that states should be able to collect sales and use taxes properly due and owing. This is made clear by the following example. Mary, who lives in New Jersey, wants to buy a ring retailing for $1000. She goes to her local jewelry store, where the ring sells for $1000, plus New Jersey sales tax of 7 percent for a totally of $1070. She goes home to find the same ring online being sold by a business located in Kansas for $1000. She saves $70 - less the shipping charge - buying the ring online. Of course, Mary is required by state tax law to declare this purchase on a use tax return and pay the $70 directly to the State of New Jersey Department of Treasury. However this slips her mind, or she just fails to do so. It's difficult (near impossible) for New Jersey to identify and tax these purchases, so New Jersey ends up losing substantial tax revenue.
Any solution that requires businesses to collect online will benefit small businesses that do not sell into other states; it will, however, harm other small businesses that do. It depends on the business model. Small businesses that make remote sales, including sales made over the Internet, will bear increased compliance costs, which could force some of these sellers to abandon Internet sales operations. Small businesses that provide goods and services remotely are as vital to our economy as those small businesses that reside in and make sales within a single state.
We do not believe that the solution to the state's inability to collect use taxes should be corrected by placing these compliance burdens on the backs of small businesses that make remote sales. If all small businesses are required to collect and file sales and use tax returns with a multiplicity of states and jurisdictions; the compliance costs will just be too high. For all businesses - especially for small businesses - the cost of tax compliance is a major expense. Adding additional compliance costs, especially in the current economic climate, would stifle many small businesses that are trying to stay afloat by marketing across state lines. Now we understand under existing proposals that the states would provide businesses with some system to collect and remit sales taxes to multiple states. But we also recognize that this is a new and untested compliance burden on small businesses, the costs of which could dissuade businesses from interstate transactions.
In the Senate, the leading legislation is the Main Street Fairness Act (S. 1452), introduced by Sen. Durbin in July 2011. The legislation would allow states that have signed on to the Streamlined Sales and Use Tax Agreement to require collection of sales taxes on internet-based sales. But one of the requirements of this bill is that the Streamlined Sales and Use Tax Agreement must include a " ... uniform rule to establish a small seller exception." This legislation does not define a "small seller;" it leaves that determination up to the states.
In the House, HR. 3179, the Marketplace Equity Act of 2011, has emerged as the leading bill. This legislation would allow a state to enforce collection of sales tax on sales made into its border from an out of state seller. Unlike the Main Street Fairness Act, the Marketplace Equity Act would not require states to sign on to the Streamlined Sales and Use Tax Agreement (SSUTA) in order to enforce sales tax collection; states would only need to simplify their sales and use tax filing systems. One method of simplification could be to adopt the SSUTA, but other simplification methods also could qualify. With respect to small sellers, this legislation does improve upon the Main Street Fairness Act, because it spells out a specific small business exemption. It would exempt businesses with $1 million or less total remote sales or $100,000 or less remote sales into a single state. While the adequacy of this limitation is debatable, the certainty of a specifically defined small business exemption is an improvement to the undefined exemption contained in the Main Street Fairness Act.
But, while these bills focus on the "small seller" exemption, we believe the more appropriate focus should be on a "small business" exemption. Small businesses are less capable of bearing the costs of a new tax compliance requirement, without regard to their actual remote sales. Under the Main Street Fairness Act, a small business that generates 100 percent of its revenue from $100,000 in remote sales would incur the same compliance costs as a large business that generates $100,000 of its $5 billion revenue in remote sales.
We should give equal consideration to the added compliance costs on small businesses, as well as the lost revenue to state treasuries. Focusing entirely on the "small seller" frames the argument as one of "how much revenue can the state forego." Instead, the focus should be on "how much compliance costs can small businesses bear before withdrawing from interstate commerce."
We need to refocus this debate to balance the needs of states to collect these taxes with the ability of small businesses to cover these new compliance costs. States need to collect sales and use taxes owed, but the costs associated with moving this compliance burden onto small businesses must also be weighed.