New Data Shows Impact of Online Sales Tax Law on Small Businesses

The Marketplace Fairness Act has likely been weighing heavily on many small business owners even before its implementation, because it could significantly alter the ways in which many companies are able to conduct their daily operations. Now, new data illustrates that it might be particularly burdensome for certain subsets of entrepreneurs in particular.

It should be noted that the law – which will require businesses of all sizes to start charging sales tax on all purchases made online at the rate set by the state in which the purchase is originating – does have some protections for the smallest of companies, according to a report from political news site The Hill. However, that only applies to companies with revenues of less than $1 million, and experts therefore say that might not provide enough protection to companies, because the exemption is too low. The study from the the Minority Media Telecommunications Council, though, said it could be particularly burdensome for women and minority small business owners.

Consequently, the organization joined many others in saying that the law should be altered, the report said. Another paper released earlier this week said that the $1 million exemption needed to be increased as well. This was commissioned by eBay and written by Jon Orszag, a former economic adviser to President Bill Clinton, and asked federal lawmakers to apply the Small Business Administration’s definition of what constitutes a small business, rather than the rather limited meaning that the bill provides. The SBA’s method for determining whether a company is a “small” business takes into account the industry in which it is operating and the number of employees it has, rather than the value of its annual revenues.

Why could this law be a problem?
The issue that many experts who object to the law have with it, in general, is that the limit of $1 million is prohibitive because a large number of even extremely small companies likely exceed that number. However, the reason that’s a problem goes beyond the fact that these companies will have to charge tax and could therefore eliminate their own competitive advantage when compared with brick-and-mortar stores, but also because of the amount of work they may have to put in to become compliant with the law.

Think of it this way: Small business owners likely have enough on their plates already when it comes to running their companies and allowing them to grow as efficiently as possible without worrying about filling out forms related to tax data for all 50 states. For example, if a company operates in California, it used to only have to process tax information for online purchases originating in that state; but now, it will have to do so for transactions coming in from New York, Massachusetts, Alaska, Illinois, and so on. Each state has its own sales tax rates and rules, too (and some don’t have such levies at all). Consequently, experts say that the financial and time-related costs of complying with the Marketplace Fairness Act, such as buying software that can calculate sales tax for every state, and then filling out all necessary the forms at the end of each tax cycle, could be extremely prohibitive. Larger companies may not have such issues simply because they could have the resources and manpower to complete such tasks without diverting too much attention from other more pressing needs.

Owners concerned about these requirements may want to think of ways they can reduce their other costs to lighten their burdens somewhat. This could include finding more affordable small business insurance policies, such as those for liability insurance, as a means of giving their more flexibility on their bottom lines.