How the Marketplace Fairness Act Could Destroy Many Small Businesses

The Marketplace Fairness Act (MFA) of 2013 is a proposed law that passed the United States Senate in May 6, 2003 and currently pending by the United States Congress. The legislation requires all remote sellers, a term that usually used to define online retailers who sell and ship goods to other state that the company has no physical presence in, to collect sales taxes and use taxes for every state and jurisdiction where they have customers if they have $1 million or more in annual retail transaction. When individual purchases goods outside of their domestic state, the out-of-state sellers have no obligation to serve as the tax collector but the consumers have the obligation to report the use tax, a tax that individual should pay if one does not pay the tax already to his domestic state. Yet, very few consumers follow the requirement. This legislation is designed to close the loophole that currently allows buyers to purchase out-of-state item and avoid having to pay sales tax. Since every state and location have different tax requirement, the MFA intend to design tax software to help companies calculate their taxes and collect taxes for up to 46 states.

One of the MFA’s main goals is to level the playing field between the local and online retailers by mandating the necessary taxes to be collect equally by every business. The MFA also attempts to protect the small businesses from the unfairness market competition set by giant online retailers, such as Amazon and Walmart. Since the MFA does not require any business to collect taxes if its retail transaction is lower than $1 million, one assumes that small businesses are being protected and benefited. However, that does not necessary be the case. With close examination, we might find that this proposed internet sales tax could potentially hurt many small businesses and negatively affect the U.S. economy.

The MFA could hurt small businesses in several ways. One of the negative impacts is causing small businesses with timely and costly audit requirement. Sales tax audits are already very time consuming for accountants and large businesses. If the policy gets approved, small businesses could potentially get hit with multiple audits request from different states. Moreover, small businesses would demand by other states’ Departments of Revenue for sales data, employee data, and even confidential financial data which they have no physical presence in. The policy could give other states an overreach of power (Hickey, 2013). The additional audit and private financial data requests by other states could increase the expense of the small companies greatly. It would also require a tremendous amount of work for small businesses to compliance with the requirements and high human error risks. Therefore, in order to prevent the timely and costly audit process, small businesses need to step up and against the implementation of this new internet sales law.

Another negative impact of the MFA is that this policy discourages start-ups or small businesses to grow. When the exemption is set at $1 million dollars, it seems to serve to protect small businesses to give them a competitive edge to compete with other online giants. However, the small companies would need to reconsider if they try to make an extra dollar in exceed of the cut-off. If the firms collect one extra dollar than the cut-off line of $1 million dollars, they would need to incur the ongoing costs of collecting sales tax in all jurisdictions. The extra step and requirement could be very costly to these businesses. If that is the case, why would small companies bother to collect that extra dollar or extra business growth if the policy could potentially cost them much more than the extra profit? This could demotivate small business owners to grow their businesses and become a disincentive to economic growth (Harrison, 2013). In addition, it could also discourage entrepreneurs in starting business in the retail sectors. Since entrepreneurs are predominantly vulnerable to any legislation that requires high cost and significant legal compliance, the MFA could become a burden and a barrier for the entrepreneurs to build a business.

The third negative impact of the MFA is how this legislation could give a competitive advantage to international sellers. Since the MFA would requires state governments to collects sales tax to where the buyers are located, that means both U.S. sellers and international sellers would subject to the tax policy and offer items at higher cost. However, the same tax policy does not mean the rate is the same for both type of sellers. For example, the same identical item that is for sale at $15 online by U.S. sellers could be for sale at $7 online by Chinese sellers. The U.S. sellers would still have customers because some customers do not care much about the $8 difference since they can receive the item faster. However, a 9% tax on $15 and a 9% tax on $7 generate very different result. The sale tax would lead to greater increase in tax for U.S. sellers than foreign sellers. Recall from the supply and demand economic theory, the increase in cost could lead to lower sales for the U.S. sellers. The decrease in sales by U.S. sellers could result to greater in sales by foreign sellers because of the greater difference in price. Furthermore, the biggest victim here is the small online business owners. Therefore, small businesses should against such proposed legislation.

Besides the negative impacts of the MFA, understanding the consumers’ respond to out-of-state sales tax could also help to analyze whether this tax law is necessary. According to a survey sponsored by shipping technology leader Endicia, it revealed that 75% of those between the ages of 18-25 will buy less online and more in store if this tax proposal becomes law. It also revealed that 44% of U.S. voters say they will buy less online because of this bill (Hayes, 2013). Since the tax proposal is creating a burden to the shoppers with greater cost, it is unpopular to the consumers and this could change the consumers’ online shopping experience. This could mean also mean that there would be great challenge for small online retailers.

When the MFA being proposed, there are supporters and opponents to the policy. Some of the major supporters include Amazon, Walmart, Target, Bestbuy, and Staples. These companies support the MFA and claim that the policy could help the state and local governments to restore fairness for the brick-and-mortar store and recover billions in lost tax revenue. What they did not mention is that the policy could also destroy small businesses by helping firms like Amazon and Walmart to get a better advantage in their sale practice. Amazon will expand from having warehouses in nine states to sixteen states by January 2014 to move its inventory closer to customers to increase delivery speed and lower shipping costs. Since the company’s long term goal is to deliver products faster and cheaper by building warehouses closer to consumers, the tax proposal does not impact them much. Instead, small businesses would be affected because they would experience higher cost because of the compliance requirement to report financial report to multiple states and handle their audit questions. As a result, this could lead more small businesses to reply on platforms like Amazon’s than put up their own website because of the burdens the proposed tax presented. Others of these supporters would want the proposed tax to implement because it could drive their rivalries’ price higher. Thus, it does not really help the brick-and-mortar stores, but destroying them.

On the other hand, some of the opponents that against the proposed policy include Ebay, eMainStreet, and National Taxpayers Union. Since the opponents of these businesses generate part of their profits by relying on the small business sellers, the loss of sales by these small sellers also mean a decrease in profit for the eBay since it collects profit from the selling fees. These businesses also claim that the proposed tax policy hurts healthy tax competition between states and would create larger burden for small businesses because these businesses would experience the burden of task to collect and remit to nearly 10,000 taxing jurisdictions.

In conclusion, the Marketplace Fairness Act has presents many implications that affect the small business owners. The burden to collect use tax and audit process for 46 states, the discouragement for businesses growth, and the higher advantage to international sellers are all potential negative impacts of the MFA. While the MFA is seen to serve to level the playing field for local and online retailers, the analysis has show that the policy would only benefit the large retailers and hurt small firms. As a result, small businesses need to step up to prevent the implementation of the MFA.

References:
Harrison, Kate. "The Marketplace Fairness Act: Should You Join The Fight to Defeat It?." Forbes. Forbes Magazine, 22 June 2013. Web. 4 Dec. 2013. <http://www.forbes.com/sites/kateharrison/2013/06/22/the-marketplace-fairness-act-should-you-join-the-fight-to-defeat-it/>.
Hayes, Mark. "What the Marketplace Fairness Act Means for Ecommerce Merchants." Shopify's Ecommerce Blog. Ecommerce Trends, 22 May 2013. Web. 4 Dec. 2013. <http://www.shopify.com/blog/7930287-what-the-marketplace-fairness-act-means-for-ecommerce-merchants#axzz2mWgilKfi>.
Hickey, Kevin. "The Marketplace Fairness Act’s Audit Risk." The Daily Caller. N.p., 20 Aug. 2013. Web. 4 Dec. 2013. <http://dailycaller.com/2013/08/20/the-marketplace-fairness-acts-audit-risk/2/>.
Martinez, Amy. "Business / Technology."The Seattle Times. N.p., 8 June 2013. Web. 4 Dec. 2013. <http://seattletimes.com/html/businesstechn