Small online retailers are under threat by a Congressional initiative that would force them to collect sales taxes for their customers’ home states. “If that happens,” writes Phil Bond, executive director of WE R HERE, “a small online retailer operating from a longtime street-front location, a modest warehouse space or even the owner’s kitchen table will have to deal with ever-changing sales tax rates for nearly 10,000 state and local tax jurisdictions.”
WE R HERE describes itself as the “unified voice of small business retailers all over America,” ranging from Army Redhead MP, a stay-at-home mom in Williamsburg who trades on eBay, to Jonathan Gonzales, of Gainesville, who does PC repair. The “WE” stands for “web enabled.”
Big retailers are backing the Congressional legislation because they have the scale to cope with the added administrative burden while small retailers — many of them operating out of their homes — would suffocate. Small retailers are suffering eroding market share as it is, Bond writes in a Times-Dispatch op-ed. “From 2008-10, “brick & click” retailers with sales of more than $20 million grew their share of online sales from 33 percent to 38 percent, while the share for smaller Web-enabled retailers with sales less than $20 million saw their share erode from 69 percent to 51 percent.”
On the other hand, state and local governments have legitimate beefs as well. E-commerce is trending steadily higher as a percentage of retail sales, and the inability to collect sales taxes is eroding the tax base of state and local governments. Meanwhile, traditional, bricks-and-mortar retailers can legitimately say that they suffer a competitive disadvantage when their customers have to pay a sales tax but those of their online competitors do not.
Bond proposes a sales tax exemption for small retailers. That’s one approach, and probably a politically popular one because it protects mom and pops. But it raises another question: Why should government favor mom-and-pop online retailers any more than, say, mom-and-pop grocery stores, mom-and-pop farms or, for that matter, mom-and-pop media outlets like blogs? One could just as easily argue that the government should favor larger, better-funded companies that develop the new technologies, new ways of doing business and other innovations that propel the economy forward. I don’t make that argument, I’m just saying that anyone can make an argument to justify favoritism for whomever he wants.
Bacon’s bottom line: A just and efficient tax regime creates a level playing field for all businesses. Winners and losers in the marketplace should be determined by their cost efficiency and appeal to customers — not their ability to persuade politicians to exempt them from taxes that their competitors have to pay. Mom-and-pop e-tailers would do better to seek marketplace solutions to the administrative burden of a tax on online sales than lobbying for exemptions.
Just as technology created the Internet tax dilemma, technology may be able to solve it. At the birth of the online revolution, only a handful of companies could afford to build the back-end ordering and billing machinery for online enterprises. Now that capability is a commodity than anyone can purchase for a nominal monthly fee. If online retailers were required to collect sales tax for the 50 states, it wouldn’t be long before the vendors of e-tailing software added modules that tabulated those liabilities automatically and deposited the funds electronically.