Currently under debate in Congress, the Marketplace Fairness Act, which, if passed into law, would require all online retailers to collect sales taxes for the sales where they ship goods. Such a law may have considerable ramifications for small businesses that have an online reach. But how much? Recently, business writer Iris Dorbian spoke to Gary Mllkwick, vice president of 1800Accountant.com, an accounting firm in New York City that works with small business clients nationwide. He also offers some tips on how small businesses should prepare themselves if the Marketplace Fairness Act is enacted into law.
ID: In light of the new Internet sales tax bill that may become law shortly, what should small business owners who have an online presence keep in mind? How will this affect them?
GM: The whole issue focuses on the relationship you have with a state to where the state has the jurisdiction to tax you. In the past, the laws have always been that if you have a physical presence (i.e. brick and mortar store) in a state and if you have employees in that state, then you, as a company, are responsible for collecting sales tax in those states where you have a physical presence.
However, when the laws were written 30 or 40 years ago, they weren’t anticipating the Internet. Now what this law is saying is that if you have more than $1 million in online sales a year, then you are responsible for collecting and remitting taxes to all states in which you are selling to—which is wherever the clients are purchasing or where the customers are located. That’s a big change. In the past, if you were operating an e-commerce business in California and you only had 15 employees there then all you had to do was collect sales tax on sales made to customers in California.
ID: Is this bill something that small business owners with an online presence should worry about?
GM: It depends on how big they are. For the mom-and-pop companies that maybe have $10,000, $20,000 or $100,000 a year in revenue, it’s not going to affect them. In one version of the bill that passed, the threshold that you would have to comply with the law is more than $1 million. My understanding is that some people in the House want to increase that to $10 million because even if you’re a business with a $1 million in revenue, that doesn’t mean you’re generating much profits. And if profits decline, [this bill could hit small businesses hard] due to collecting and remitting sales tax from different states. The people who are most worried right now are those who are in the $1-million to $10-million annual sales bracket.
ID: So the bill could actually benefit qualified small business owners?
GM: While it is true that the law does create some additional reporting requirements, it may actually make the scary process of collecting and paying sales taxes much easier than the business owners expect. The bill passed by the Senate and now being considered in the House includes a provision that states have to provide free software that calculates the sales tax on items sold in the state, and files the required reports for the business owner. There is also a safe-harbor provision in the law that protects small business owners from penalties if they collect the wrong sales tax amount because of a problem in the software they use.
Also, in the bill passed by the Senate [there’s a provision that] will force states to simplify their sales tax collection process. In particular, each state will only be allowed to have a single point of contact for sales tax. Right now, some states, such as Alabama, require separate payments in each county. So the law could reduce the number of sales tax jurisdictions from hundreds (maybe thousands) to just 50 (one for each state).
GM: Yes and we expect to get more calls as news stories about the law continue to appear. I think business owners are going to be quite relieved once they understand what the law actually says. The key is to be prepared for the change. The proposed legislation has broad bipartisan support and it's a pretty good bet that it will pass in some form. Business owners who are prepared can continue to profit from online sales, while those who wait until the last minute may have to scramble to comply.
ID: As a small business tax expert, do you see any problems with the bill?
GM: Not necessarily. I kind of see it from both sides. I think for our clients, they would like to see a higher threshold of $10 million to $50 million because that $1 million threshold is pretty low. The margins are so thin they’re not making very much profit on a million dollars in online sales.
ID: Based on your experience and insight, how should small business owners who have an online store or e-commerce site prepare themselves if this bill becomes law? What should they do and what should they not do?
GM: Make sure they have good reporting systems in place and they have a plan for being compliant. The worst thing is if they aren’t prepared and don’t begin collecting the sales tax. Then you run into serious penalties and interest. Figure out a way to be in compliance—whether that’s [small businesses] doing it internally or whether it’s hiring someone else to do it.
Disclaimer: The opinions expressed are solely those of the author and interviewees. Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.