The Marketplace Fairness Act will bankrupt small businesses

Drex Davis Co-Founder, eMainStreet Alliance
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Last month, the Senate passed the Marketplace Fairness Act (MFA), which would force online businesses to collect and remit sales taxes to remote states. The bill is now under the purview of the House Judiciary Committee, which is chaired by Rep. Bob Goodlatte (R-VA).

The eMainStreet Alliance, which I co-founded, is a grassroots group of more than 300 online retailers who have come together to help lawmakers understand the destructiveness of the MFA. Our members have been compiling the cost of implementation for their organizations. In a recent letter to the House Judiciary Committee, we highlighted that these costs range from $20,000 to $300,000 in the first year alone, costs that exceed the annual profits of many of our companies.

Proponents of the MFA, such as Gary Shapiro, the head of the Consumer Electronics Association, say that deciphering, collecting and remitting taxes to more than 9,600 jurisdictions will be “relatively simple” because “technology and innovation will make [it so].” That’s not true. Compliance will be anything but simple.

For example, in Wisconsin, U.S. flags and Wisconsin state flags are sold tax-free, while other flags are subject to sales tax. However, the rules are different when a flag is bundled with a flagpole. There are thousands of examples like this; each jurisdiction has its own idiosyncratic tax laws. A printout of the rates and exemptions for all jurisdictions is 811 pages long — four inches tall when stacked.

If the House passes the MFA, audits will commence. These audits will come from states where we have no physical presence, no political representation and no right to vote. The number of states capable of auditing our businesses will increase from one to as many as 46 (the number of states with sales taxes). Online retailers will then be vulnerable to the sort of tax-agency targeting that has shocked Americans in recent weeks — from 46 different state tax-collection agencies. That’s terrifying.

Penalties for sales tax noncompliance tend to be onerous, and most states can hold a company’s “responsible person(s)” personally liable for any unpaid sales tax liabilities. A state can confiscate our personal possessions in order to collect unpaid sales tax owed by our companies. Unlike Wal-Mart, Amazon.com, Best Buy, Home Depot and other big retailers, we do not have armies of accountants and tax attorneys to deal with costly and time-consuming audits from every state. Yet, one innocent mistake could put us out of business and personally bankrupt us.

Proponents of the MFA are blind to this reality. Bill Hughes, a lobbyist for the Retail Industry Leaders Association representing Wal-Mart, Abercrombie & Fitch and others, said, “If you’re over $1 million in sales, you’re big business. We aren’t crushing any mom-and-pop stores with this legislation.” The Small Business Association says that businesses of $30 million or less in annual sales are small businesses. Most members of the eMainStreet Alliance don’t come close to exceeding this threshold and are mom and pops, too. Crushing our businesses is exactly what this legislation does.

Consider that the largest and most powerful online retailer in the world, Amazon.com, currently has a 1% profit margin. A business with annual sales of $1 million with Amazon’s margins makes $10,000 in profit. Factor in the cost of compliance with the MFA starting at about $20,000 and you can see how the MFA threatens online mom and pops.

Proponents of the law say that without the MFA, Internet companies will put brick-and-mortar retailers out of business. Don’t be misled. The truth is that online sales are already dominated by brick-and-mortar businesses. According to James S. Gilmore III, the former chairman of the Congressional Advisory Commission on Electronic Commerce, 83% of all online sales are by big-box retailers, and their share of online sales is growing.

Big-box retailers see the MFA as a way to put online mom and pops out of business, just as they’ve put your local mom and pops out of business.

Congress should stand with small business — the backbone of economic growth — and oppose the MFA.

Drex Davis is a co-owner of Scrapbook.com and co-founder of the eMainStreet Alliance, a grassroots organization consisting of more than 300 small online retailers. Connect with him at eMainStreet.org.