Hold On, Congress Is About To Handcuff Online Sellers

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A version of this article previously appeared in Forbes.

Congress' latest attempt to impose an "Internet sales tax" is just another misguided tax grab that will do more harm than good to American small businesses.

The Remote Transaction Parity Act (RTPA), introduced by Representative Jason Chaffetz (R-UT), purports to simplify sales tax collections while also leveling the playing field between brick and mortar businesses and online sellers.

Noble goals, no doubt. Unfortunately, it accomplishes neither.

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Does Congress Think Nexus Is A Shampoo?

As it currently stands, online sellers must collect sales tax in the states where they have, "sales tax nexus." While every state has a slightly different definition of nexus, it is generally defined as, "a physical presence, employee, or products stored in the state." In the state's eyes, merchants with nexus uses state resources like roads, which justifies collecting sales tax from buyers within their state. Sounds reasonable, right?

In theory, the concept of nexus makes sense. However, in the hands of government bureaucrats, the definition of "physical presence" can become farcical, encompassing an independent affiliate which links to your site or a company's participation at a trade show.

Sales tax nexus requires sellers to register for a sales tax permit with every state in which one of their customers resides, which can amount to 12 sales tax payments per year, per state. Successful online sellers, those who are doing well and helping to drive what little growth the US economy has seen over the past six years, have to learn the vagaries of each nexus state's sales tax laws, including those of individual counties and municipalities which levy separate taxes. Online sellers are already awash in sales tax complexity.

If the RTPA passes, the current level of complexity will explode, as e-tailers will be required to collect sales tax from buyers in all 45 states (plus D.C.) which have a sales tax. The complexity of simply knowing what rate to charge each online customer will increase exponentially, as there are over 10,000 taxing jurisdictions within the United States. The RTPA will require online sellers to collect sales taxes, based on the rate applicable tied to the buyer's shipping destination.

Not only would the proposed law require vendors to determine a customized sales tax rate for every sale, it will create a reporting nightmare. Many states require online sellers to break down the taxes they've collected in each taxing district. Imagine doing hundreds or thousands of sales per month and then having to decipher where each sale was made, in order to comply with the new law. This onerous, time consuming burden hardly "levels the playing field."

Congress was clearly influenced by the well-funded retail lobby, which characterizes online sellers as "tax evaders," while describing brick and mortar stores as "mom and pop operations just trying to survive." Nothing could be further from the truth.

While in the past a clothing designer may have opened up a brick and mortar store on Main Street, she now opens her store online and reaches a wider audience. Why punish her for making a good business decision? In addition, most savvy brick and mortar operations also leverage the Internet to broaden their geographic reach and expand their customer base - the world is no longer comprised of exclusively online and offline sellers.

You may be thinking, "Certainly Congress contemplated thresholds that will absolve small companies from such overheated intensive tax calculations." Sadly, this is not the case. The threshold is $1 million per year in gross receipts. That may sound like a lot, until you consider that the metric is gross revenue, not profit. Most online sellers of physical good have low profit margins - due to the cost of sourcing products and transporting and warehousing them. A seller could readily gross $1mm per year and still barely make a living.

Yet, you may still think, "A million bucks is a lot, this won't hurt my definition of a small business." Think again. The RTPA explicitly states that all online sellers, irrespective of their size, which use electronic marketplaces (e.g., eBay, Amazon or Etsy) will be required to collect and remit sales tax in all 45 states. Will small sellers who resell thrift store goods to make extra money be motivated to deal with this regulatory burden? Even online sellers who make their living selling items full time on eBay or Amazon may shut down their operations, once their taxes become 45-times more complex.

The Government To The Rescue

The bill promises an unspecified "electronic solution" for small businesses. As an investor (through my VC firm Rincon Venture Partners) in TaxJar, a company in the sales tax space, I know firsthand how difficult it is to implement an on-the-fly calculation of taxes when 10,000 taxing jurisdictions must be considered. The determination of taxes owed must be made instantly, once the customer finalizes their online cart and is ready to check out. Given the government's stellar record of creating web services (anyone remember the $1 billion spent on the flawed Obamacare website?), it is doubtful small businesses will ever be offered a workable solution, as promised by the RTPA.

The RTPA's intended consequences will be significant, ultimately burying thousands of emerging eCommerce "mom and pop" entrepreneurs under a mountain of expensive and impractical regulations. The unintended consequences will be even more dramatic - equivalent to suddenly slamming the brakes on our sputtering economy.

Follow John on Twitter here: @johngreathouse. I promise I will never tweet about that killer burrito I just ate.

Image: Cynthia Stine

John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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