Plan would require small businesses with more than $500,000 in annual "remote" sales to collect sales tax, putting a new administrative burden on e-tailers.
Two of the largest forces in online retail, Amazon and eBay, gave testimony Wednesday related to a controversial Senate proposal that could force small businesses selling their wares in cyberspace to start collecting sales taxes for virtually every state, city, and county that currently charges them.
The legislation would require businesses selling online to charge and pay sales taxes in each state or local municipality where an Internet transaction was made and then delivered. It would exempt only very small businesses, those with less than $500,000 per year in "remote" revenue.
That means a massive operational effort for any small business that generates more than this amount, which could translate into another disadvantage between independent small businesses and large online retailers that have a national presence.
Growing Support By States, Amazon
Although the idea of requiring online sales tax has been raised repeatedly at the Congressional level over the past five years, the current measure seems to have more legs as states seek pretty much any way possible to collect new tax revenue in the stagnant economy.
Some point to a University of Tennessee estimate that state and local governments could lose up to $12 billion next year in uncollected taxes. The fact that the retail industry was expected to report its strongest "Cyber Monday" ever, with more than $1.2 billion in online sales, can only add fuel to the fire.
The current proposal also has strong support from Amazon, which has lobbied loudly for its passage.
An article in The Wall Street Journal reports that the company argues that online sales taxes are the only way to help level the playing field between "Main Street" businesses and those selling in cyberspace.
Paul Misener, Amazon's vice president of public policy, told the Senate judicial committee that Amazon planned to help smaller sellers deal with the change by providing technology to help collect sales tax, something that has been a worry for smaller online retailers.
"No one should want these online sellers to take advantage of a newly created un-level playing field over small Main Street businesses, and no one should want government to pick business-model winners and losers this way," Misener said. "Amazon is prepared to make its technology available as a service to help sellers by collecting sales tax for them."
Tough Break for Small Online Retailers?
While the legislation could help level the playing field for small businesses selling products only in the "real world," smaller companies that rely only on the Internet as a sales vehicle could be in for a rude awakening from a cost perspective.
"It's not the startups or the Amazons of the world you have to worry about here," Joe Sponholz, president of BabyAge.com, told The Wall Street Journal. "It's all the guys in the middle."
Indeed, what remains most at issue is the threshold at which smaller online retailers should begin paying taxes. That is where eBay's position is notable, since it believes that the taxes will unfairly burden smaller companies. It is arguing that the U.S. Small Business Administration should have a hand in picking the level at which the government would start collecting sales tax.
“You hear a lot about fairness in this debate,” said Ted Cohen, vice president and deputy general counsel of eBay. “Some have claimed that a ‘level playing field’ means all retailers using the Internet should be held to the same remote sales tax standard. However, sameness is not fairness. Small-businesses retailers face many competitive disadvantages when compared to larger retailers.”
Those disadvantages could soon be multiplied if this legislation passes.
Heather Clancy is an award-winning business journalist with a passion for small businesses, green technology and corporate sustainability issues. Her articles have appeared in Entrepreneur, Fortune Small Business, The International Herald Tribune and The New York Times. Follow her on Twitter.