The Marketplace Fairness Act’s audit risk

Kevin Hickey CEO, Online Stores Inc.
Font Size:

Recently the Marketplace Fairness Act (MFA) passed the US Senate. The bill is currently being considered by the House Judiciary Committee chaired by Bob Goodlatte. If it passes, the MFA will require small businesses like mine to become tax collectors for over 10,000 taxing jurisdictions and it would subject us to audits from 46 states, 6 territories, and over 500 Native American tribal nations. I’ve been through a sales tax audit in my home state of Pennsylvania and it was one of the most unpleasant experiences of my life. My audit experience is the foremost reason why I helped found the eMainStreet Alliance – a coalition of over 650 small businesses who have joined forces to expose the harm of the MFA.

People who have never been through a sales tax audit — including many members of Congress — simply don’t understand what a nightmare it is. But I know the burdens and costs first hand.

My company, Online Stores, Inc., has always collected Pennsylvania sales taxes and has never skirted the law. But when we were audited, the auditor was determined to find every possible way to extract money from us. She spent 160 hours sitting in our offices scouring over invoices in an effort to find errors and levy penalties on us.

She cited obscure, confusing, and often contradictory case law to try and prove we had skirted the law. We sell American flags and U.S. military flags online and through a catalog. Even though the Pennsylvania law clearly states that these items are tax exempt, the auditor insisted that historical U.S. flags and official U.S. military flags are not exempt. She also asserted that all shipping charges were taxable, even when orders included products that were tax exempt. But the case law was unclear on this issue – and still is! It didn’t matter. She fined us for nonpayment and noncompliance.

When she was done, she handed us a bill for over $25,000 dollars for uncollected sales taxes, penalties, and interest. The entire $25,000 was due immediately and she told us that if we disagreed with her findings, we had to file an appeal with the state Department of Revenue. We did appeal the ruling and that appeals process was frustrating, time-consuming, and costly.

If the MFA passes, this experience would be multiplied exponentially for thousands of small businesses like mine. We’ll be vulnerable to auditors in states where we have no presence, no voting rights and no representation. To make matters worse, if we make mistakes, many remote states can “pierce the corporate veil” and confiscate our personal possessions in order to satisfy their demands. In other words, we are personally responsible for the taxes whether or not we collect them from our customers. This is taxation without representation.

I do not believe my audit nightmare is an outlier. In fact, as I have talked to other online retailers I’ve realized that my experience is actually quite common, even the norm. Many accountants and tax attorneys have expressed reservations about the MFA for similar reasons. Thomas Mazurek, a CPA and state tax adviser with the accounting firm Tronconi, Segarra, and Associates recently expressed his concerns with the MFA, “I know how challenging and time consuming sales tax audits can be. I can’t imagine how a small business will handle getting hit with multiple audits.”

As small businesses, we are vulnerable targets for aggressive state auditors. In fact, many of us are already receiving letters and phone calls from other states’ Departments of Revenue demanding that we disclose to them our sales data, employee data and even our confidential financial data. We have no presence in these states and yet they are already demanding access to our private data. This is a gross overreach of power and it illustrates what is coming if the MFA passes. Even though the law has not passed the US House, states have already budgeted for funds they believe the MFA will raise. Make no mistake; the auditors are coming for us en masse.

I encourage Congress to protect small businesses and oppose the MFA. I invite small businesses everywhere to join the eMainStreet Alliance.

Kevin Hickey is CEO of Online Stores, Inc., and cofounder of the eMainStreet Alliance.