The prospect of having to deal with state-by-state sales tax collection for Internet transactions is a “nightmare” for Colleen Rast of Great Sky Gifts of Kalispell.
Rast’s company sells new men’s and women’s clothing through eBay and Amazon. Working with her husband, Jeff, she has turned a hobby into a lucrative small business in a 6,000-square-foot warehouse in Evergreen. The company employs two people full time, with plans to continue growing and adding more workers.
However, she said, their plans could be derailed if the Marketplace Fairness Act, introduced on Feb. 14 by Rep. Steve Womack (R-Ark.) and Sen. Dick Durbin (D-Ill.), is passed by the U.S. Congress. The bill would require out-of-state online retailers to collect and remit taxes for each of the 9,600 sales tax jurisdictions in the United States.
“It would be a clerical nightmare or we would have to outsource, and that’s nothing we can afford,” Rast said. “We don’t benefit from the tax money that would be collected, no benefit from road improvements in different states, no benefit from police or fire protection in different states.
“This would take away from our growing business, and instead of growing our business and hiring more people, we’d have to put energy and resources into collecting and remitting.”
Lance Trebesch, CEO of TicketPrinting.com based in Bozeman, says the passage of the bill would not only inhibit small-business growth, but would also put the brakes on the creation of more “Montana success stories.”
TicketPrinting is an online business that prints custom tickets for any event, as well as posters, wristbands and other event-related paraphernalia. It was founded in Bigfork in 1997 by Mike Yinger, who is currently a co-owner of the company and chief technology officer.
“Many businesses in Montana have robust e-commerce channels, as it is a way for us to get beyond our geography,” Trebesch said. “This would essentially stop the growth of all that innovation happening.”
The backers of the bill say that the measure would close an unfair loophole that benefits online retailers over local brick-and-mortar stores. Under current law, states can only collect sales taxes from retailers that have a physical presence in their state.
The bill, which has bipartisan support, would require states to provide tax software to retailers, if they request it, to make compliance easier.
But Phil Bond, executive director of the WE R HERE coalition of Internet small business retailers, said in an interview from Washington, D.C., that the software would do little to mitigate the impacts were the measure to pass.
“Unfortunately, according to studies done by PwC [PricewaterhouseCoopers] accountancy firm, that’s only a fraction of the cost,” he said. “Studies show that for every $6 you assess in sales tax, you have $1 in costs yourself, training people to monitor the system, storage of the data, potential audits for whatever state.”
Bond said the bill in almost the same form has been introduced in the last few sessions, but Congress has been unable to pass it. He said that it’s just a case of states “looking for any kind of revenue they can get. But we’re saying stay within your borders, that’s the way the Constitution is set up.”
Trebesch said it’s a “gateway tax.”
“It would be a gateway to taxing everything that’s happening on the Internet — cloud services, physical goods — anything bought over an e-commerce channel.”
The proponents of the act claim that the online retailers are gaining an unfair advantage with the current system.
“It’s time to stop discriminating through the tax code and put local and Main Street retailers on a level playing field with their out-of-state and online counterparts,” Sen. Mike Enzi, R-Wyo., the bill’s lead Senate sponsor, said at a press conference on Feb. 14.
Rast doesn’t believe that it’s truly about a clash between Main Street and cyberspace.
“They’re trying to make it online versus offline, but it’s really about big business versus small business,” she said. “We don’t get the benefit big businesses do, we don’t get the tax breaks from the local community.”
A proposal is that sales tax would only have to be collected by businesses with sales volume of more than $1 million, but Rast said that the cutoff is too low.
“Even a small business can obtain that,” she said. “Often what looks like sales revenue isn’t.”
She said, for example, that Great Sky Gifts offers free shipping for orders inside the United States and subsidizes shipping costs internationally. Shipping is recorded as part of sales totals; however the business still has to pay for the shipping.
She said that increased shipping rates over the last few years, especially in cross-border trade, have been a hurdle for her business, but the proposed online tax is a much bigger threat.
“By far this legislation would affect our business the most,” she said.
Sen. Max Baucus, D-Mont., is in a strong position to affect the outcome of the bill as Senate Finance Committee Chairman.
Bond said that Baucus has been a “champion” for the small online retailers in the past, and an aide to Baucus said that the senator has again expressed concern over the proposal, in large part because Montana is one of five states without a sales tax.
“He was central to blocking a December effort when they were trying to put this onto a defense bill,” Bond said. “He said this is no way to legislate a tax bill and he put a halt to it.”
Trebesch is placing his hopes on the influence of Baucus.
“Senator Baucus is a key person in all of this, it all has to go through his committee,” he said. “I’ve been talking with him and his staff about the devastating effect this would have on Montana businesses.”
Montana-based members, as well as members of other sales-tax free states in the WE R HERE coalition, have been among the most outspoken about the bill, Bond said.
“They have a lot at stake because if this legislation were to pass, any Montana-based company selling online would still have to collect sales tax from every customer,” he said. “They are saying, ‘our state has chosen not to go down this path, how can you force our people to do this?’”
Business reporter Heidi Gaiser may be reached at 758-4439 or by email at firstname.lastname@example.org.