The Internet Taxation Issue: How to Fix the ‘Marketplace Fairness Act’ for Small Business – a Proposal and a Challenge

todd_morrisAn Open Letter to Congress and All American Consumers

By Todd Morris, Founder and CEO, BrickHouseSecurity.com

As Congress considers legislation requiring small businesses to collect sales tax for 46 states and more than 9,600 separate taxing districts, I respectfully suggest that members of both Houses consider the ramifications should the proposal in its current form become law.

As a small business owner, I’m not against paying taxes or collecting sales tax where it is the law to do so. The real question is not whether sales tax is due, but rather, who should collect and distribute the tax? And who is the auditing authority?

The current proposal (aka, The Marketplace Fairness Act),  is neither fair nor reasonable. It is an unfunded mandate and places the burden of an overly complex tax system on the shoulders of small business owners. This will force many small businesses to close their doors or dramatically scale back their growth plans.

I’d like to summarize the problems and put forth a proposal that addresses them in a way that’s both acceptable and beneficial to all concerned parties.

A group of my colleagues from eMainStreet.org and I feel so strongly about this issue, we’re traveling to Washington at our own expense to meet with members of Congress who are still open to hearing our side.

We’re making the trip in part because the National Retail Federation (NRF), which has come out in favor of the proposed legislation, does not speak for small business. The NRF is controlled by the world’s largest retailers. Small business does not have an effective lobbying or political advocacy arm that can stand up for the interests of independent retailers. This advocacy imbalance results in misinformation presented as fact and planted stories in the press that fail to paint an accurate picture of today’s retail landscape, all funded by big corporate money.

The Devil is in the Details

The current sales tax code is incredibly complex. It’s unreasonable and unfair to expect companies who do not have a multistate presence to create the financial and technical infrastructure required to comply.

It’s easy to say that “free software” will make the complex web of 9,600 districts and uncounted product-specific tax rates easy to manage for a small business. Unfortunately this web of complexity is just too much for “plug-and-play” software to solve. To paraphrase the software legend Scott McNealy, “Open source software is free like a puppy is free.”

A Plan That Can Work

If the federal government really wants to get involved in enforcing state tax laws across borders, I’d like to offer a plan that will have the desired effect – more sales tax collected for state and local governments – without threatening the financial solvency of already strapped small business owners like myself and tens of thousands of others across the United States.

There’s a fair and logical way for small businesses to collect sales tax nationally without drowning in implementation, administration and legal costs, and uncapped risk

I can sum up a plan that makes sense in three sentences:

  1. There should be one single, easy-to-collect tax rate for all Internet sales.
  2. All sales tax receipts should be sent to one centralized location.
  3. Sales tax should be distributed to the states by one federal agency, which would have sole responsibility for enforcement.

If the federal government judges it to be too complex or costly to manage sales tax collection and disbursement among the states with a single rate, how is it fair to saddle small business owners with that responsibility for 9,600 rates? The law should be simple enough that any business of any size can comply with the requirements without undue burden.

The states can either accept a single fair and negotiated sales tax rate, OR they can keep their complex web of 9,600 districts and multiple rates. But they can’t have both. And they can’t cripple small business with the monumental cost of figuring it all out.

A Simple Way to Prove the Facts

I challenge the U.S. government to prove how easy it is to implement its current proposal. The U.S. Mint, which operates an ecommerce site (usmint.gov), should be required to spend one year implementing, collecting and distributing sales tax for all states and all 9,600 taxing districts, then it should report back to Congress on the actual cost in dollars and hours necessary to comply with the proposed law.

It would also be fair to ask the Treasury department why it is not yet collecting sales tax on its website. I assume Treasury has offices and employees in at least some of the states in which usmint.gov has customers.

Fairness On Main Street

The currently proposed legislation purports to be about protecting small, independent retailers – the mom-and-pop storefronts on Main Streets across the country.

It does just the opposite.

It puts up an impenetrable roadblock across the only avenue of possible growth by mandating a tax-collection nightmare for brick-and-mortar businesses that hope to expand their reach online.

Mom-and-pop stores have been under attack for far longer than Internet retailers have existed. Small brick-and-mortar businesses are not scared of small Internet retailers. They are scared of Walmart, Target, Best Buy and Sears. And rightfully so. Remember, Barnes and Noble killed the independent bookstores long before Amazon existed, and Blockbuster killed the local video stores before Netflix was even possible.

In a world increasingly dominated by a small number of huge multinational corporations, the Internet is the last “neighborhood” where a small independent retailer has a chance to provide choice and selection to American consumers. Put aside the potentially lethal blow this proposal will deal to many small businesses. Do we really want our grandchildren to live in a world where the sum total of their shopping choices are dictated by a few all-powerful mega-corporations?

A Dangerous Precedent

Any law that extends states’ taxing rights and jurisdictions beyond their borders could push us down a slippery slope and raise significant questions of constitutionality. The proposed legislation will set a dangerous precedent.

Most small businesses, including BrickHouse Security, are formed as S-Corps or LLCs. This means that as the business owners, my partner and I are responsible for paying personal income tax in all states where we have a physical location. That’s why we pay personal income tax in New York, where we live, and Indiana, where our company has a distribution center.

If my small business is mandated to pay sales tax in states where we don’t have a physical location, what’s to stop the government from forcing me and tens of thousands of small business owners to pay personal income tax in every state?

What the Proposal Would Do to Small Business – a Brief Case Study

BrickHouse Security currently collects and remits sales tax in two states: New York, where we have our corporate offices, and Indiana, where our distribution center stocks and ships inventory and processes customer returns. If we have a fire, I’m pretty sure I know which state will send the fire trucks. We already collect sales and employment tax for those states, and I file personal income tax in both states.

Our small but valiant accounting team (which includes my wife) spends a full day each quarter just to calculate and file taxes for each state. That’s eight days per year for only two states.

For us to file taxes in 44 more states we would need to pay approximately $70,000 just to buy and integrate the software into our shopping cart and financial software. The hard truth is, even “free” software is expensive to implement and maintain.

But that’s just the tip of the financial iceberg for small business owners.

After the first year, we’ll need to pay to keep the software up to date, and we’ll be on the hook for many more billable hours from our accounting team and outside CPA firms.

More importantly, if just one of the 46 states which currently charges sales tax wants to audit us, the accounting and legal bills will grow to tens of thousands of dollars per audit – and that’s assuming we did everything perfectly and weren’t found guilty of some accidental oversight. With 46 states targeting us, our chances for one or more random audits each year will be terrifying – and crippling to our long-term expansion plans.

Small businesses should never be forced to make sense of the current complex web of 9,600 tax rates – or to conduct their day-to-day operations under threat of a random audit by 46 states.

For the collective health of small businesses across the country and the U.S. Economy as a whole, I urge Congress to rewrite its proposed Internet taxation legislation to include a single, easy-to-administer tax rate and the means to collect it.

Remove the unfunded mandate and craft a fair and sensible bill that serves the common good –rather than one that serves a few mega corporations who would like to see less choice for the American consumer.

About the author  ⁄ Todd Morris

Todd is the CEO of BrickHouse Security. He founded the New York City-based firm in 2003 after an impressive 15-year career in the software industry, where he worked for such visionary companies as Apple, Adobe and MapQuest. Todd launched BrickHouse to provide access to hard-to-find security products for professional and personal use. The site debuted to immediate success and has seen over 200% growth each year since its inception.

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