Interest is growing in the "Marketplace Fairness Act" recently introduced in the House by Rep. Steve Womack (R-AR) (H.R. 684) and in the Senate by Sen. Mike Enzi (R-WY) (S. 336). This legislation would require businesses to collect and remit state sales taxes on sales of goods and services made into other states. For states that have a sales tax, the Marketplace Fairness Act is a good thing. But for businesses, this legislation will result in additional compliance costs, and these costs will disproportionately affect small businesses.
While the Marketplace Fairness Act does contain a “small seller” exemption which exempts those businesses that have $1 million or less in remote sales, this approach does not address the real concerns of CompTIA’s small business members. Instead of a small seller exemption, the legislation should provide a small business exemption, because small businesses are less capable of bearing the incremental costs of a new tax
For example, under the Marketplace Fairness Act, a small business that generates 100 percent of its revenue from $1,000,001 in remote sales would incur the same compliance costs as a large business that generates $1,000,001 of its $5 billion in revenues in remote sales. While we recognize and support the rights of states to impose and collect sales taxes, the costs resulting from shifting the burden of tax collection and compliance filings to sellers will fall disproportionately on small businesses.
We believe the legislation should balance the added compliance costs that will be incurred by small businesses with the lost revenue to state treasuries. Focusing entirely on the small seller exemption frames the argument as one of how much revenue the state can forego. Instead, the focus should be on how much compliance costs small businesses can bear before withdrawing from interstate commerce.
Looking back to a draft interim report, dated December 8, 2008, by the Small Seller and Vendor Task Force of the the Streamlined Sales Tax Governing Board, we believe there is merit in that recommended approach. Under that report, a business would be exempted if it had national sales of less than $5 million. Also, businesses with $5 million or more in revenue would be exempted if that business had less than $100,000 in remote sales. We believe this approach, which focuses on exempting small businesses and larger businesses with $100,000 in remote sales, is preferable.
We should refocus this debate to balance the needs of states to collect these taxes with the ability of small businesses to cover these new compliance costs. States need to collect sales and use taxes owed, but the costs associated with moving this compliance burden onto small businesses must also be weighed. It’s not just the burden of collecting, reporting and remitting these taxes. Small businesses could also be subject to audits and inquiries by multiple foreign jurisdictions.
The Marketplace Fairness Act should not be adopted in its current form. Instead, we favor an approach that would exempt small businesses from these new and costly compliance requirements. Accordingly, we recommend adoption of a small business exemption that, consistent with the 2008 report to the Streamlined Sales Tax Governing Board, would provide an exemption for small businesses with less than $5 million in total annual revenue.
