Just Say No To The Marketplace Fairness Act
by Andy Logan
“There are severe limits to the good that the government can do for the economy, but there are almost no limits to the harm it can do.” Milton Friedman 1912 Nobel laureate
On May 6, 2013, the Senate voted 69-27 to approve the Marketplace Fairness Act of 2013 (S. 743). Aside from the legal challenges regarding collecting sales tax in states without representation (Reference 1), the Marketplace Fairness Act (MFA) in its current form has numerous fundamental flaws. Based on these flaws alone it would be more accurate to title this as the Online Small Business Elimination by Taxation Act. The MFA as it exists today would require small businesses that generate revenue at or in excess of $1M to collect the state sales taxes from nearly 10,000 different sales tax jurisdictions. What’s the logic supporting this $1M dollar revenue target? Here’s why this matters to you and why you should be so concerned. Think about this.
As reported on a Heritage.org blog “The Marketplace Fairness Act (MFA) is anything but fair, because instead of leveling the playing field, it would tilt it decidedly against online retailers, particularly small ones. Brick-and-mortar stores would still have to collect sales taxes only where they are physically present. Online retailers would have to collect sales taxes from the nearly 10,000 sales tax jurisdictions around the country where their customers live. That is not an equal burden.” (Reference – 2)
As reported in a recent Forbes.com article “the Corporation for Enterprise Development (CFED) which is a nonprofit that aims to help low- and moderate-income households build and preserve their assets, performed a study with research funded by MasterCard’s Center for Inclusive Growth, which focuses on building sustainable growth and financial inclusion. They focused on Microbusinesses which they define as small businesses with 5 or less employees. The CFED calculates that 92% of all small businesses in the U.S. fall into this category. Among such firms across the country, the CFED found, half have a household income of $50,000 or less, below the national median of $53,046. Revenues of the businesses in the CFED’s survey ranged from less than $49,000 to more than $1 million annually, and in most cases, the business was the owner’s primary job. The entrepreneurs in the phone survey tended to be older and more experienced than those in the online survey”. (Reference – 3)
About the only thing all political affiliations seem to agree on is that small businesses are the backbone of the American economy. If we believe the CFED research, it’s reasonable to say that 92% of the economy’s backbone is coming from 5 employee or fewer small businesses. It’s reasonable to assume that businesses generating annual revenue of $10M or greater probably have more than 5 employees. Therefore the number of businesses generating $10M or greater that are included in this 92% is very low. Based on these assumptions we could say that 92% of small businesses are generating less than $10M in annual revenue. Therefore, the issue we need to be worried about regarding the MFA in it’s current form is how many small businesses fall in between $1M – $10M annual revenue because these small businesses would be the most negatively impacted by the MFA. The number of small businesses included in my suggested sample range of $1M – $10M will likely be very significant if for no other reason than the statistical likelihood that my sample range of $1M – $10M captures far more of the 92% of small businesses than those that fall into the $10M or greater range. I’m confident that setting the revenue inclusion point of the MFA too low would not generate greater tax revenues for the states because it would force a large number of the small businesses between $1M – $10M annual revenue to completely close their doors. The reason being that businesses between $1M – $10M would be financially incapable of dealing with the burdensome MFA requirements. Many of the small businesses that would be crushed by the MFA are the same businesses still recovering after surviving the economic downturn in 2008. They are being faced with a consistently deteriorating and increasingly more hostile small business environment. Think about this.
To support my point let’s evaluate an online retailing business with 4 employees that generates $1M of annual revenue. Realizing the ultra competitive nature with online retailing we will estimate this small business is operating with a 25% margin on sales. This 25% margin yields $250,000 of gross operating revenue. I then make the following assumptions;
$1M Sales Revenue
– Gross Revenue after Cost of Goods – $250,000
– Total of 4 salaries including the owner – $190,000 (Note that none of these salaries even meet the national average median household income level)
– Remaining annual revenue before expenses and taxes – $60,000 or $5,000/month
$5,000/month does not go very far towards covering rent/mortgage, utilities, insurance, marketing & advertising, increasing health care costs, retirement, state & federal income taxes. It doesn’t require a financial background to realize that the competitive nature of online retailing indicates how it’s already challenging for this $1M annual revenue small business to cover their existing operating expenses. It simply would not be possible for this business to hire additional employee(s) and/or the outside consulting service that would be required to manages these 10,000 tax code jurisdictions while submitting up to 45 state sales tax reports on a monthly basis. This doesn’t even take into account the fact that these businesses sales revenues would undoubtedly be declining as experienced by Amazon. (Reference – 4) It’s very easy to understand why the MFA is strongly supported by big box retailers. THE MFA WILL ELIMINATE A LARGE PORTION OF THE BIG BOX RETAILERS COMPETITION. However it’s also important to realize that many of these small businesses are not only generating domestic sales revenue but are also generating a significant amount of international sales as well. By forcing these small businesses to close their doors, the MFA in its current form would also be shutting down the revenue stream being pumped into the U.S. economy from these small businesses international sales. This could potentially damage an already fragile U.S. economy. Think about this.
In Summary – What the MFA means to you as a consumer
As a consumer what does all this mean to you? It’s extremely simple; Less competition = higher consumer prices. MFA = more taxes at a time when tax revenues are reaching record levels WHILE at the same time the federal deficit continues growing at a record rate. “Federal tax revenues will reach $3 trillion in 2014 for the first time in the nation’s history, the White House Office of Management and Budget said.” (Reference – 5) The MFA would add yet another tax which would further complicate the existing overly complicated tax code. Trying to address internet taxation is not something that should be done in a stand alone bill when we are already forced to deal with an outdated, illogical tax code that is far too complicated and burdensome to the economy. Trying to force a stand alone bill like the MFA to deal with internet taxation would only increase this burden at a time when the risk of damaging an already fragile U.S. economy is much too high. Rather than introducing any new stand alone tax code to address state sales taxes on internet purchases it should be considered as one part of comprehensive, overall pro-growth tax reform. Now really step back and think about how the MFA will negatively effect; 1) a large number of small businesses, 2) therefore the economy, 3) therefore YOU.
“Five percent of the people think; ten percent of the people think they think; and the other 85% would rather die than think.” Thomas Edison, 1847 – 1931
Additional resources
@NoInternetTax
@Heritage
@MarkLevinShow
@ebaygr
@freedomhouseDC
#NoNetTax
#DCFlyIn2014
References
1 – http://www.law.cornell.edu/constitution/amendmentxiv
4 – http://www.campaignforliberty.org/national-blog/internet-sales-tax-hurts-amazon-sales/
5 – http://www.newsmax.com/US/tax-revnue-record-high/2013/11/15/id/536868#ixzz2zxXtGIVf
6 – http://www.donttaxtheinter.net/ (source of image at the top of this article)
The views expressed in this article are those of the author and are in no way associated with any other author or publication unless directly quoted and referenced accordingly.