SBA Report Analyzes Sales Tax Fairness Issue

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Uneven sales tax collection has helped online retailers at the expense of Main Street retailers, according to the study “An Analysis of Internet Sales Taxation and the Small-Seller Exemption,” released this week by the Small Business Administration. The report examines both whether the Marketplace Fairness Act, which would give states the right to require remote sellers to collect and remit sales tax, is the solution to this inequity and what effect the small-seller exemption would have on small e-commerce firms.

The report, written by Donald Bruce and William F. Fox of the University of Tennessee Center for Business and Economic Research, stresses that legislation — which includes a $1 million small-seller exemption — would apply to just 0.04 percent of firms selling via e-commerce. It further notes that federal legislation is the “only effective means for slowing the relative decline in states’ sales tax bases.”

“This comprehensive study by the SBA confirms that a federal marketplace fairness solution is needed to level the retail playing field, protect small businesses, and restore states’ rights,” said the Marketplace Fairness Coalition, a group comprised of businesses of every size, sector, and channel of product distribution located in every state. “The arrival of the holiday shopping season is an important reminder that thousands of small businesses and local jobs are under threat because of the current unfair retail playing field. SBA’s study confirms that a reasonable balance can be reached to protect small online sellers, while giving brick-and-mortar retailers the fairness that they deserve.”

In the report, Bruce and Fox note how, over the years, states have ramped up efforts to collect sales tax that is being lost via remote online sales. However, they write that “these endeavors have been insufficient in terms of helping states restore shrinking sales tax bases and improve the fairness of their sales tax systems.”

In regards to the Marketplace Fairness Act, the authors said that the small-seller exemption would reduce administration and compliance costs, though it would also reduce potential revenue gains by exempting a portion of online sales from the obligation to collect and remit sales tax. The report states that, as such, the exemption requires “careful consideration” as to whether reducing the costs is worth the loss in revenue, and whether the exemption would affect business decisions about where to locate, how to structure operations, and how large to allow sales to grow.

The report concludes, “It is important to recognize that small firms would not necessarily be harmed or helped by legislation such as the Marketplace Fairness Act… Existing Main Street vendors — small and large alike — would continue to be disadvantaged relative to many online and mail-order vendors that would be protected by a small-seller exemption.” This may result to slower growth rates for businesses once they pass the small-seller exemption, it notes, because consumers may end up going to smaller sellers to avoid paying sales tax.