Business

3 reasons why the online sales tax exemption should be higher than $1M

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Matt Winn is Volusion’s marketing communications manager.

With the Internet sales tax debate lingering in Congress, many online retailers are anxiously waiting to see how passage will impact their business operations and bottom line. One major item that’s in flux is the “small seller exception,” which states that online retailers earning less than $1 million in out-of-state sales each year are exempt from the requirements of the Internet sales tax legislation.

The idea behind the small seller exception is to help remove the burden of the online sales tax from small businesses and prevent any long-term impact on their growth. And while that notion may be an admirable one, the $1 million threshold is far too low and should be raised to a much larger amount.

Here’s why.

1. The $1 million figure is arbitrary
The wording of the current Senate bill implies that a “small seller” is one who generates less than $1 million in out-of-state yearly revenues. This threshold, however, is in no way related to the size standards defined by the Small Business Association. For some context, the SBA’s size standards “define whether a business entity is small, and thus, eligible for Government programs and preferences reserved for ‘small business’ concerns.”

In fact, the SBA has very specific definitions of a small business based on annual receipts or an organization’s number of employees. This information can be found in Title 13, Section 121 of the Code of Federal Regulations. Some examples of small businesses within the “Retail Trade” industry include:

  • Furniture Stores: $19 million
  • Electronics Stores: $30 million
  • Women’s Clothing Stores: $25.5 million
  • Sporting Goods Stores: $14 million

With current small business standards already in place, the Marketplace Fairness Act has an approved baseline for what revenue amounts should and should not be exempt from an online sales tax. By following these guidelines, not only does it move the thresholds to an agreed upon standard, it helps protect small businesses from the burdens imposed by a new online sales tax.

2. The $1 million figure puts a burden on small online retailers, impacting economic growth
While the small seller exception has good intentions in protecting the smallest of businesses from taking on the cost of implementing the online sales tax, it still places a big weight on the backs of small to medium-sized retailers. One study commissioned by a group known as the True Simplification of Taxation (TruST) states that retailers with five to fifty million dollars in annual sales will spend $80,000 to $290,000 in setup and integration costs, with annual costs ranging from $57,500 to $260,000.

Beyond implementation costs, here are some additional implications that the miniscule $1 million threshold could have on the economy:

  • Reduced incentive to grow an interstate ecommerce business: Why sell across borders and be forced to implement taxes when you can just sell at home?
  • A negative impact on overall online sales: Unlike in a retail store, online shoppers are typically required to pay an additional shipping fee. Mix this with an unexpected sales tax amount and online retailers will see a lift in abandoned carts and lost sales.
  • A potentially adverse effect on the macroeconomic landscape: Ecommerce has been a bright spot in the economic recovery, experiencing double digit growth across a span of multiple years. A potential slowdown in ecommerce growth could have larger implications for the economy as a whole.

3. The $1 million figure hurts the competitiveness of small businesses against mega-retailers

The fact that mega-retailers such as Amazon support the online sales tax legislation should be a red flag to smaller merchants. Whereas in the earlier days of the internet, when online selling was only accessible to the largest players, ecommerce is now readily available for businesses of all sizes. Because of this increased competition, mega-retailers see the Internet sales tax as an opportunity to increase their market share online, as these big brands can bear the brunt of the taxes that might otherwise harm smaller players.

To further demonstrate the play against small businesses, Amazon is openly championing the Marketplace Fairness Act because, in many states, the company is exempt from collecting sales tax. Pair that with their lobbying and political power to further expand these exemptions, and it becomes clear that the world’s largest retailer is looking to expand its presence at the expense of small businesses.

Whether you agree or disagree with the idea of an online sales tax, it’s hard to argue that in its current form, the implications of the small seller exception being set so low are real. Even more concerning, a recent House bill on the matter removes the small seller exception completely. As the debate continues across the country, small business owners would be well-advised to keep a close eye on this legislation.

Matt Winn is Volusion’s marketing communications manager, where he helps oversee the organization’s branding and communications efforts. Matt has created hundreds of articles, videos and seminars on all things ecommerce, ranging from online marketing to web design and customer experience.

More information:

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