The new Wal-Mart Tax and Why It is just Plain Wrong
Wal-Mart wants you to pay more in taxes, and if you own a business that sells things online it wants to put you out of business. Congress and the Obama Administration wants to help them.
I want to specify upfront I am not talking about an Internet Sales tax in general, I am specifically talking about the Internet Sales Tax that has recently passed in the Senate. If you own a small or medium sized online business that sells products or services this new tax will likely put you out of business and if you’re a consumer it will kill the competitive marketplace and drive prices up.
One of most often cited reasons for levying any Internet Sales Tax is that the playing field needs to be leveled between local mom and pop type operations and big Internet retailers like Amazon. That is the small Main Street business is at a disadvantage because they are required to collect sales tax from all their customers, but the Internet based business has a built in advantage because it is only required to collect sales tax from customers that reside in the same state as their business operations. Proponents of the act claim the online retailers are only able to offer the consumer a lower price for any given item because the customers don’t have to pay the sales tax they would have to pay if they purchased the item locally.
The bill’s supporters say the bill will help small Main Street businesses. Indeed the bill’s name is the Marketplace Fairness Act, and the chief lobbying group behind the bill is an organization called the Alliance for Main Street Fairness. Taken at face value these goals sound laudable and have mass appeal as most people want to help Main Street survive. However, when one peels back the curtain at the Alliance for Main Street Fairness the Wizards they will find are Wal-Mart, Target, Home Depot and a lot of other big box retailers. Ironically, most of the main street type businesses that have disappeared over the last twenty years disappeared as the result of big box retailing having exploded all across America.
The competitive disadvantages of being an Internet based retailer offset any advantage gained from not having to collect sales taxes from customers that live out of state.
Shipping: Internet based businesses have to ship out each order individually, but if you’re a retailer with a physical location you customer picks the item up at your location. Shipping is outrageously expensive even a small iPod sized item will cost you roughly $6 to ship, plus $1-2 for a box, and another 20-50 cents for packing materials and shipping labels. Retailers with a physical location just don’t incur any of these costs. Furthermore, if the customer decides to return an item the online retailer has to pay the return shipping.
Credit Card Processing Fees: Typically online businesses pay a higher percentage of charges on credit card transactions than an offline business does. This is because the online merchant doesn’t deal face to face with the consumer and the online business doesn’t get the consumer’s signature on the receipt which it makes it easier for the consumer to dispute the charge. The credit card companies say Internet transactions are an inherently riskier proposition so they have to charge online retailers more. Typically online stores pay 2-3% more per transaction in fees.
On the Internet Almost all Products have undergone Commoditization: If your vacuum cleaner breaks and you need a new one you won’t go into all 30 or so of the stores in your area that sell vacuum cleaners to compare prices. The value of the time that would take and the gas that it would cost would exceed any savings that could be had by doing a real world price comparison. Now if you want to buy a vacuum on the Internet you can shop 100s of retailers in a few mouse clicks. Any online retailer always has to be competitive on price if they want to sell anything which makes for drastically lower margins.
Why compliance with the Marketplace Fairness Act will be impossible for most small to medium sized online businesses.
A Mountain of Paper Work and Fees: Under the Marketplace Fairness Act as passed in the Senate Internet Retailers will have to be able to comply with the taxing regulations of all 50 states and any of the 9,000 or so local taxing districts within the 50 states. In order to collect sales tax in a state most states require you to obtain a business license in that state. This typically requires you to fill out a several page long application and then submit a fee. These fees could cost the typical small Internet based business several thousands of dollars alone.
What is worse once you obtain the business license from the taxing authority in any state that is just the start of your obligation to that state. Typically most states require you to file quarterly returns detailing the amount of sales tax you collected. Think of your state income tax return now imagine filling that out four times a year. Now imagine filling that out 4 times a year plus filling them out for all 50 states. That would be 200 tax returns you would have to file each and every year. The Marketplace Fairness Act will also subject to audit in all 50 states. Doesn’t sound so fair does it? The Main Street business that collects tax on everyone only has to file set of quarterly reports in one state. The Main Street business also only has to charge one rate even if the customer resides in another state. One can only ponder as to how many accountants and attorneys in the different states an online retailer will have to hire to be able to complete all of these tax returns.
A 50 fold increase in Legal Exposure: Once you fill out an application to obtain a business licenses in any given state you are going on record as saying it’s ok to file suit against you in that state as you do business there. Under current law Internet retailers are protected because it is difficult for someone to sue them in a state that they don’t have a physical presence in. Likewise an offline business can only be sued in a state that it has a presence in even if its customers come from many different states. Under the Marketplace Fairness Act an online business could be sued in any state because they would have business licenses in all of them. Furthermore, all states have their own unique commercial and consumer laws. As a new subject of all 50 states’ jurisdiction you would now also have to comply with all 50 states’ laws in these areas.
Point of Sale Issues: Under the Marketplace Fairness Act the Internet Business would potentially have to collect the tax rates of 9,000 different taxing jurisdictions. I’ll let you in on a little secret most small online business don’t have a programmer on staff because they can’t afford one. Here is what Overstock.com said about how much it cost to add just one additional state’s tax to their checkout system.
Overstock.com selected a software package to enable it to collect sales tax in one additional state. It took 20-30 of the company’s IT professional staff and nearly six months and more than 9,400 man hours to integrate the software into the company’s IT system and map the million products the company sells. The company calculated that the total cost of just the start-up phase was nearly $1.3 million for this ONE state, including the first year software license fee, employee and contractor time, and the use of existing IT hardware dedicated to the collection of the tax in the new state.
Even if a few small to medium sized Internet Business can survive the cost of having to hire numerous CPAs and attorneys, the cost of implementation will eliminate the rest of them. Think of a typical eBay power seller dose anyone honestly believe they have the means to comply with these requirements.
But what about the Million Dollar exemption wont it keep small businesses from having to comply with this?
A lot of people get confused over this it is a million dollars in gross receipts not profits. So in other words what a business charges their customers for the item including shipping costs would count towards their million dollars. Most Retail sectors are low margin businesses, and online the margins are typically much lower because most of the Interne is what is know as a commoditized market. It is not unheard of to be running on less than a 1% margin. I have met more than one person over the years that had several millions of dollars a year in gross receipts, but their entire take from the business was well under 1ook. I suspect thousands of eBay power sellers that sell from their home as a one or two person business shatter this million dollar barrier easily.
In today’s big box retailing environment many small Main Street type businesses people have found the only place they can compete with big box retailers is online. On the Internet they don’t have to have the capital to open large warehouse size stores across the country. Many small and medium sized Internet retailers will have to close if the Marketplace Fairness Act passes in the House because they will simply not be able to afford the cost of complying with the law. Rather than help Main Street Wal-Mart, Target, Home Depot and some of the rest of the Big Box retailers want to steal the only sliver of the pie they have left.