The US Congress is now considering legislation requiring sales tax collection for most online sales.

Requiring sales tax for online purchases isn’t a bad thing. Unfortunately, the current legislation has the potential to kill small, online businesses—innovative companies like Sparkfun, Makerbot, Adafruit, and many more.

These kinds of companies are America’s best hope for reinventing our manufacturing sector, particularly in electronics and high tech. Yet we’re about to crush them under a mountain of paperwork.

The proposal with momentum would create a national sales tax for online purchases but allow different regulations and rates in every state. For small online sellers, navigating the U.S. tax system would become more complex and bureaucratic than dealing with Europe’s VAT system (we know, we have to deal with them both).

The only way to change course is if more of us stand up now and engage in the legislative process to fight off this legislation. We need a single national process for state sales-tax filing, remittance, and auditing. Don’t allow small business to be killed by 46 states worth of regulation.

Please contact your representatives (House, Senate) and say “No Internet sales tax without a unified system. Don’t kill America’s small online businesses!”

For those who are curious on the detail, here is more background.

There has been much discussion of whether online sales should be taxed, and whether the calculation of this country’s 9600 or so different sales tax rates (based on shipping destination) creates an undue burden on sellers.

But that’s not the real issue.

The real issue is a Walmart or an Amazon can afford (and already has) thousands of lawyers and accountants. The burden of having to file a sales tax return with 46 different states every month or every quarter doesn’t scare them (it’s actually 45 states + DC — 5 states don’t have a sales tax). Hundreds of checks going out each year isn’t a problem. Understanding the complex and subtle differences in regulations of 46 different states is difficult, but doable for them. The ability for those states to demand your financial records and interview you for audit — they’re used to that risk and pain.

But for the small company who has created a unique, innovative product and needs to sell it nationwide to have it reach its market — these burdens are a killer.

It’s particularly so for innovative new startup mechanisms like KickStarter — projects like Printrbot or MaKey MaKey would potentially have to tackle 46 states’ worth of regulations to ship their products to customers (and comply with all laws in doing it). These innovations could be stillborn.

For Plugable, we already spend several days a quarter filing an 8-page sales tax return with 328 different calculated values for different city and county tax districts in the State of Washington. Some states are simpler, but we’re looking at having that burden be multiplied by as much as 20 fold (assuming some of the 46 states adopt a truly unified system voluntarily). And this doesn’t even count the initial reading and remembering each states’ rules and filing procedures — just one state can be weeks of initial preparations and ongoing complexity.

Here’s what’s wrong and how we can fix it:

1. The current legislation punts on making states truly simplify and unify their regulations, subjecting everyone who sells online to the crushing complexity of complying with the demands of up to 46 different taxing entities.

There are actually two bills in committee — one which tries to protect small business from getting killed by complexity, and one that does not.

The “Marketplace Fairness Act” is the bad guy — it punts on true simplification. It has a clause (3b) which cops out and lets every state have their way with businesses in every other state around the country, with minimal simplification. Yet it is this version of the bill that appears to have momentum. Please call or email your representative to vote against S. 1832 (H.R. 2701), or at least to amend it to remove section 3(b).

Whereas, the “Main Street Fairness Act” at least requires states to present a single point for filing, paying, and auditing, though the Streamlined Sales Tax Governing Board. This bill is not perfect, but at least tries to deal with the massive burden sales tax collection imposes on small business — a burden so severe that it caused the Supreme Court to originally rule that forcing small businesses nationwide to become tax collectors for each state, to be a violation of the Constitution’s Commerce Clause (Quill 1992).

What to do: Contact your representatives (House, Senate) to make simplification a precondition for requiring sales tax collection by small business — a single national point of contact for state sales tax filing, remittance, and auditing. Don’t allow small business to be killed by 46 states worth of regulation.

2. The current legislation exempts any sellers with annual sales of $500K or less. This figure is too low. A company with annual revenues of $1 million or even $10 million still doesn’t have the resources of an online company that sells billions of dollars of goods every year.

What to do: Contact your representatives (House, Senate) to fight for
a higher exclusion for small business. Don’t let the big online retailers fight for regulations that could kill off their smaller competitors.

Much of this appears esoteric. But this is actually a key fight for American innovation. Thanks for your support of America’s small businesses that sell online.

Bernie Thompson
Founder, Plugable Technologies

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