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Why the Internet Sales Tax Increase Is a Dream Crusher for Small Business

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Monday's Senate decision drew shock and concern across the nation from small businesses who sell online, and rightfully so.

The Marketplace Fairness Act (MFA) would grant states the authority to compel online retailers, no matter where they are located, to collect sales tax at the time of a transaction. Today, online sellers are only required to charge sales tax in states where they have a physical office or warehouse. The MFA, backed by President Obama, is purportedly aimed at leveling the playing field between brick-and-mortar stores and those who don't have a physical presence.

But if the future of selling is online -- as I and many others believe it is -- then you have to step back a bit and look at the whole picture to see who this bill is really going to help and harm.

Follow the money

Of course, you don't have to look too hard to see who is the real beneficiary of this proposed legislation. Just look at the companies throwing their weight behind it -- Amazon, Walmart, Target. All of them have major online selling operations, and all of them can afford to deal with the added costs and hassles that come with paying taxes in every state in which they sell.

Of course, Amazon is ostensibly the target of this legislation. The idea is that forcing them to pay taxes means they no longer have the tax-free advantage against brick-and-mortar stores. The thing is, not charging tax on orders is no longer a true advantage for Amazon -- and they know it.

A few years ago, Amazon would have fought this bill with everything they have, just as they did all other attempts to force them to pay sales tax. More recently, they've realized that convenience is a much bigger advantage to capitalize on. Manufacturing that convenience meant building more warehouses in every state, which in turn meant they had taxable nexuses. Amazon was already headed down this road.

The irony is, of course, that Amazon built their business on having lower prices and no tax. And now that they've scaled to the point where it no longer matters, they can bring their lobbying might to bear on the side of Internet taxes and cripple their smaller competitors who can't afford to keep up with compliance.

Bad for (small) business

And it would be crippling. Most small business selling online simply don't have the time or money to do the paperwork necessary to file tax returns in 45 additional states -- and keep in mind that they'd have to do so monthly. While Amazon can afford to throw entire teams of people at the problem, an online store run out of a house with only a few employees (if that) can't make it work. Many businesses operate at margins of only 10-20 percent, so their actual income and ability to cover these incremental operating costs are comparatively low.

And that's who we're talking about, here. Because while the bill stipulates that only companies making more than $1 million in out-of-state revenue are required to charge customers Internet Sales Tax, that takes in a much greater swath of businesses than you might think.

Gross Merchandise Value (GMV), a financial term commonly used in online retail to calculate revenue sold through a particular marketplace, also includes fees the seller pays to the marketplace they're using to sell (like eBay or Amazon). So while an online retailer may have a GMV over $1M, their actual profit is much less, putting them at a severe disadvantage.

Accordingly, the revenue threshold for this new initiative should be raised considerably to at least $20 million in GMV. Now that nearly everyone can afford to sell online -- and most can't afford not to -- keeping the threshold so low is going to stunt small business growth, limit mom and pop operations who are following their passions, and, frankly, crush the American dream.

As written, this legislation will irrevocably inhibit small businesses from entering a thriving e-commerce market and will put many current small online retailers out of business. E-commerce is a $226 billion-a-year business in the U.S., growing at 30 percent. Many of those businesses are small retailers or family-owned businesses -- not huge corporations. They have been riding the wave for the last few years, and while they may not currently be pulling in $1 percent in annual revenue, they are getting dangerously close.

Additionally, the Senate may not realize just how much the MFA will distort the market. Imagine how many online retailers will try to skirt the rules by creating multiple businesses, all under the $1 million radar, just to avoid collecting additional taxes in 45 states. Equally concerning is how many current small business retailers will fold or have to downsize their business just to hire additional employees to manage their state taxes.

Who this hurts

Bigcommerce has nearly 35,000 small businesses using our e-commerce platform to sell online. And while our service doesn't charge transaction fees, many of our clients are multi-channel retailers, meaning that they sell through multiple platforms (Etsy, eBay, Amazon and their own e-commerce web store). In the past 48 hours, we've spent some time talking to a few of our clients about the impact the MFA will have on their businesses.

One retailer in Wisconsin has a lot of overseas competition on a commoditized product. He sells Halloween costumes and masks that can also be purchased online from China. The tax increase would be hugely detrimental to his business. A consumer searching online for a particular costume, like the mask used in the movie Scream, would easily purchase it from the Chinese retailer solely based on lower cost, leaving him out.

Another business sells a niche product: unique tools for bakers that are not sold in stores. The husband and wife who own the company aren't particularly concerned that the 6-8 percent increase in the total sale will deter buyers. Consumers love their product and know they're getting the original. They're more worried about the administrative nightmare of sorting through the various state and local tax rates. The duo already work tirelessly, seven days a week, to keep their business going. They wonder what the legislation will do to their time management and overhead if they have to hire additional people or tax experts.

The changes proposed by the MFA could do to these merchants exactly what the big-box retailers did to small brick-and-mortars -- drive them out of business.

While the future of the legislation remains uncertain, it's time for our government to take a deeper look into the real impact this legislation will have on the little guys. U.S. small businesses are millions and millions strong and growing at astonishing rates. These are dedicated, hard-working Americans looking to fulfill their dreams and support their families. Favoring big business in this decision will massively impact the market and the future of e-commerce for small businesses, the lifeblood of job creation for the U.S. economy.