The politicians in Congress are once again demonstrating their lack of understanding regarding how business and the economy actually work. Legislation now being proposed could endanger thousands of small-to-mid sized online businesses. H.R. 5660, the Main Street Fairness Act, first introduced by former Rep. William Delahunt, Democrat, (MA) on July 1, 2010, now being prepared by Democrat Rep. Dick Durbin (Ill.) and still in the House of Representatives, would require retailers to collect sales and use taxes for online purchases, based on local rates, for areas where purchasers actually reside. It is an ill-conceived attempt at increasing tax revenues to states and an effort to level the competitive playing field between “brick and mortar” businesses and online retailers. Traditional businesses are required to collect sales taxes from their customers but according to recent rulings by the US Supreme Court, online retailers are only required to collect sales taxes for states in which they have an actual physical presence.
States short on revenues and those with laws requiring citizens to report online purchases and pay the taxes directly or require out of state purchases to be reported on state income tax forms have been largely unsuccessful in such efforts. These states and others have been lobbying for the act. While the most likely well intentioned legislation contains an exemption for small business, the exemption can’t be depended upon because it could easily be eliminated as the bill makes its way through the House or when it gets to the Senate. Leaving aside the discriminatory nature of such exemptions which usually result in the big government picking winners and losers, the bill could pose a real threat to small online retailers.
Large companies such as Amazon.com have vast resources and could relatively easily comply with any such legislation. However, if the small business exemption were successfully removed from the bill and it were passed into law, it could pose an enormous burden on small online stores and remove incentives for businesses on the margin to grow and hire new employees. Compliance would require companies to purchase expensive new sales cart software or upgrade existing software, to provide for automatic calculation of the myriad of rates across all the US states and territories. These rates not only vary from state to state but by county, city and in some cases, smaller areas like zoning areas and zip codes. In addition, the software would have to be updated constantly to keep up with all the changes occurring each year, likely requiring the addition of otherwise unnecessary employees or services to ensure accuracy and timeliness. The task would be daunting and expensive for small businesses and would in many cases, eliminate the already small profit margins these online sellers realize and drive them out of the market. This legislation, if passed into law, could cause the loss of thousands of online businesses and the jobs they create. It may also have a significant impact on small, traditional businesses that increasingly rely on internet sales as important secondary sources of revenues and profits.