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Small Business Association releases Internet sale tax analysis

By Nick Bullock
Published: November 22, 2013
The U.S. Small Business Administration recently released a new report examining the impact of a small seller exemption (SSE) in any potential Internet sales tax law.

The report concluded that brick-and-mortar retailers would continue to be at a disadvantage relative to small online retailers if an SSE provision were added to an Internet sales tax law. The report also stated that although an SSE provision would reduce administrative and compliance costs of smaller online retailers, it would also reduce the potential revenue gained by state and local governments.

Currently, state and local sales tax laws apply to online sales, but online retailers aren’t required to collect and remit those taxes unless they have a physical presence in a state. Consumers are supposed to pay those sales taxes each year, but few do.

Proposed Internet sales tax legislation would put the onus on online retailers to collect and remit online sales tax.

The Marketplace Fairness Act of 2013 passed in the U.S. Senate in May, but the legislation has since been stalled, in part because of the proposed exemptions.

The online sales tax legislation as currently constructed would exempt online businesses with less than $1 million in revenue. Some businesses and lawmakers have argued this is not a large enough exemption and that collecting sales tax and conforming to the different tax codes of each state is an unmanageable administrative burden. Others have said an exemption would still put brick-and-mortar retailers at a disadvantage compared to the small online retailers that would be afforded an exemption, as the SBA report concluded.

The National Retail Federation released a statement Nov. 19 in support of the report’s findings.

“This objective, non-partisan and peer-reviewed academic analysis and report from the Small Business Administration confirms what local retailers have been saying for decades: The lack of a level playing field between brick-and-mortar stores and their online and remote competitors is blatantly uneven and unfair, and continues to place them at a competitive disadvantage,” NRF Senior Vice President David French said.

Many hobby dealers have also voiced their support for the legislation, including National Retail Hobby Stores Association President Bruce Throne.

“I would say [Internet sales tax legislation] factors heavily into whether a brick-and-mortar store can be competitive,” Throne told Model Retailer following the Marketplace Fairness Act’s passage in the Senate in May. “It should help brick-and-mortar stores level the playing field that little bit more.”

The SBA report also found the commonly discussed $1 million SSE would require the top 974 online retailers to collect and remit taxes online sales tax should the Marketplace Fairness Act pass into law. This accounts for $138.7 billion, or 57.3 percent, of total online sale volume. A $5 million SSE would require the top 750 online retailers to collect and remit online sales tax, yet it would still account for $138 billion, or 57 percent, of total online sales volume.

Donald Bruce and William F. Fox of the University of Tennessee Center for Business and Economic Research produced the SBA report.
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