Amazon isn’t yet screwing up this Christmas for small businesses, but the retail giant may just be getting started.
The shopping behemoth has supported a bill, now stuck in the House, known as the Marketplace Fairness Act. It would allow state governments to collect sales taxes not just from stores in their states, but also online from businesses outside their states. The bill was passed, symbolically, by the Senate last year. It’s now time for the House to consider “e-fairness”.
The impact could be harsh for small businesses that have been savvy enough to join the digital age by setting up online storefronts with attractive websites and brisk online sales.
For those businesses, online sales were a godsend: if sales happen through a website with no physical presence in the customer’s state, they usually involve little or no sales tax, which saves both consumers and small business owners plenty of money.
But if it does eventually pass in its current form, the Marketplace Fairness Act would be a “complete debacle” for small and mid-sized retailers, says Clay Olivier.
As CEO of Volusion, a software platform that counts 40,000 small and mid-sized retailers as clients, Olivier is quick to note he definitely understands both sides of the argument. But, he explains, “if I put myself in one of our [small business’s] shoes”, the implications of having to keep track of over 9,000 different taxing jurisdictions and other nuances – then fearing an audit if all is not reported correctly – “is a real challenge”.
Call it the ghost of Christmas-shopping future.
Here’s one small business that’s concerned: the Red Dress Boutique, which is doing a brisk business this holiday season.
Despite reports to the contrary from the National Retail Federation that store sales were slumping as consumers kept spending in check, the Athens, Georgia-based women’s fashion retailer is on track to exceed $12m in gross revenue this year, a sizeable jump from the $7m it drew in 2013.
This isn’t surprising for the Red Dress Boutique’s chief operating officer Josh Harbour. Though the boutique has but one physical location, it operates an online shop that sells clothing, shoes and jewelry to customers across the country and Canada. Harbour estimates that e-commerce makes up 95% of the Red Dress Boutique’s sales and he believes he’s not alone.
“E-commerce has exploded the past 20 years,” says Harbour. “One of the main reasons is the relative lack of taxation and regulation. It is much more of a free market than brick-and-mortar stores.”
Whether it was the lack of taxes or the lure of one-day-only deep discounts, or both, Cyber Monday sales bore Harbour’s theory out: according to comScore, e-commerce exceeded $2bn, the heaviest online spending day in US history.
Those mostly tax-free sales days may soon be over as lawmakers and major retailers get set to try to nudge Congress to pass the Marketplace Fairness Act.
A supporter of the bill, Republican senator Mike Enzi of Wyoming, combined it with a popular House-passed measure extending a moratorium on taxing Internet access. House speaker John Boehner then vowed to block the bill from moving forward during the last days of this session, citing “significant concerns”.
The $23bn question
If a tax were collected, the impact would be significant.
According to the Federation of Tax Administrators, last year approximately 10% of annual state sales taxes lined state coffers after the holiday selling season ended. That’s more than the average of 7% to 8% per month. Data from the National Governors Association and the National Conference of State Legislatures estimates that states could realize $23bn in uncollected taxes if the bill passes.
As if the threat of new taxes and competing with Amazon weren’t enough, smaller e-commerce companies have plenty of additional struggles as well, says Olivier.
Limited budgets, resources and staff, combined with other factors such as Google changing its search algorithms – which in turn makes some niche businesses harder to find – all present significant hurdles, he says.
Although he says he’s not opposed to an internet sales tax, Harbour notes that for an apparel retailer like the Red Dress Boutique, there are further complications.
“Beyond rates, different counties tax items differently,” he explains. “Some assess sales tax on clothing, some do not. More specifically, some exclude clothing that could be worn as part of a uniform while still taxing everyday clothing,” he says. When every one of the 9,000-plus jurisdictions has different tax rules, “that is an enormous amount of complexity,” Harbour says.
One of the provisions in the Marketplace Fairness Act excludes annual sales to a certain amount. Most recently that was around $1m.
Although shop owners such as Gordon fall well within the limited revenue, Harbour says, “even if it was $5m, that would be nowhere near enough”, as the retailer will exceed that by a substantial amount this year.
That revenue number pales in comparison to e-commerce giants like Amazon, but Harbour contends those companies have teams of accountants to handle the required tax computations.
Olivier points out that there is existing software that is designed to help ease the burden of figuring out how much to charge whom. If the bill passes, he says, Volusion would integrate those systems into its own software to further facilitate tax collection for its clients.
But it’s not just online retailers who would be impacted by the passing of the Marketplace Fairness Act.
Rebecca Gordon, owner of Style By Becca, a salon and accessories boutique in Greenville, South Carolina, doesn’t have an e-commerce site but says she does occasionally ship orders to customers in other states.
While holiday shoppers who find her on Facebook are boosting sales for her store, Gordon says it helps not to have the added burden of calculating taxes for orders from out of state.
The way Gordon sees it, the prices for the jewelry, candles and purses she’s peddling from her retail space are already below those of nearby shops, as well as from some other e-commerce merchants. Those who don’t charge sales tax can either pocket the extra money or keep prices even lower. “It definitely makes you think”, she says, “about what it takes to compete.”
