The Marketplace Fairness Act is a proposal that recently passed in the Senate and will require state governments to collect sales taxes and use taxes on all sales by online retailers regardless of whether they have a physical presence in the state the sale took place in or not. Currently, retailers are required to collect sales and use taxes only from states in which they have a physical presence.
Many small businesses, which operate mostly online, fear the paperwork and audits as much as they fear new taxes. Rick Smith, the owner of Chefresource.com says that his biggest concern is the compliance costs and audits. He says that even under the best of circumstances, audits are stressful, invasive, time consuming and costly. They might even include extra accounting costs.
Collecting sales tax in states where a small business has no physical presence is tremendously difficult. An online company might have customers from 40-45 states each year. Collecting sales tax from so many jurisdictions and states will require much time, effort, and money.
Every jurisdiction taxes goods differently. There are 9,600 jurisdictions that collect sales taxes, and all have different tax rules for retailers. The complexity of collecting sales taxes from a large number of jurisdictions can be troubling, with many small businesses unable to bear the cost.
The act may not only affect retailers. It includes online retailers and catalog sellers, and may also involve remote vendors, distributors and manufacturers who supply online retailers. It is speculated that the Internet sales tax will lead to an increase in wholesale and retail prices, as suppliers will pass on the additional costs to consumers.
Businesses with out-of-state gross receipts of less than $1 million are exempt from Internet sales tax, but small businesses believe that the exemption is too little and will benefit very few. The proposal for Internet sales tax as it stands now spells trouble for small online businesses, as they do not have the luxury of spending more on accounting. Along with the competition, taxation now presents a clear danger to their survival.