My Wall Street Journal Opinion Piece – In August 8th Paper

I’m very excited to write about an opinion piece I wrote for the Wall Street Journal.  I’m thrilled that one of the most prestigious papers in the world is including my piece about the Marketplace Fairness Act in the August 8th 2013 Journal.

The piece is about the real-world impacts the Marketplace Fairness Act will have on my business and other similar businesses and it addresses the many myths the pro-MFA big box lobbyists and tax compliance companies are shoveling on a daily basis.

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Text of my opinion piece:

August 8, 2013

Calling Foul on the Marketplace Fairness Act

The cross-state sales tax legislation is a grave threat to online businesses like mine.

Proponents of the Marketplace Fairness Act—which would enable states to collect sales tax on Internet vendors—have had very little difficulty getting the word out about why this legislation should become law. Well-connected big-box retailers, venture-funded tax service companies and Amazon.com certainly have the budgets to run an excellent PR campaign for passage of this bill. Lost in this lobbying shuffle are a large number of businesses who will be severely hurt or even put out of business by this ill-conceived bill.

I’m the owner of Chefsresource.com, an online retailer of gourmet kitchen items for the past 14 years. We’re a family-run business with a fairly small number of core employees who handle all aspects of our online business. We’re located in California and collect sales tax for our California shipments.

The biggest concerns I have are about compliance costs and the audit possibilities under the MFA. Right now, I am in the middle of my second California sales-tax audit. Even under the best of circumstances, audits are stressful, invasive, time consuming and costly. A good auditor is thorough and just doing his job, but the hard expense of extra accounting assistance and, more important, the demands on my time are a real challenge and take away from my ability to grow my business. The MFA would require companies like mine to collect sales tax in states where we have no physical presence, opening us up to the risk of audit by as many as 45 sales-tax states each year.

I truly cannot see how our business could possibly handle audits by scores of different states and tax jurisdictions at any one time. Even a few audits per year would be more than we can handle, and the personal financial responsibility for any audit deficiencies is frightening to me. The only safe-harbor provision in the MFA is that companies would not be held responsible if an error is made by the government-certified software provided “free” under the proposed law.

But software glitches are only a small portion of the possible audit issues. For instance, how would this new remote auditing power be enforced? Will they come to my office like my local auditor does? Of course not. Will we be compelled to attend audits in different states? This is not addressed in the bill or directly addressed in the states’ simplification standards document.

The myth of free software solving everything is especially infuriating to business owners who actually understand the business processes involved. To quote McKane Davis, president of Scrapbook.com and one of the founders of eMainStreet Alliance, a grass-roots group of online small businesses opposed to the MFA: “The software is free like a puppy is free.” Every state is allowed to offer its own choice of software. The software might be custom-written by the state, or might be licensed from a tax-software provider. It’s not possible to integrate numerous, incompatible “free” solutions into our business. The only solution is to pay a provider.

Unfortunately, even paid solutions will not fully accommodate our fairly standard business requirements. There is far more to sales-tax collection than figuring out the correct amount due in the shopping cart. Avalara, a leading sales-tax compliance service can certainly handle that small aspect of the big picture. But they don’t currently work with our order-processing software, which handles phone orders, returns, sales-tax reports and more. Our Amazon sales cannot be handled through this paid service either. Amazon sales-tax collection would have to be handled through Amazon itself—for a fee of course.

The small-business exemption excluding companies with remote sales of less than $1 million sounds generous, but is far too low. Assuming 5% net margins, (Amazon’s is closer to 1%), that’s $50,000 a year in net profits. Compliance costs will wipe out a large chunk of those profits. The definition of “small” also will be a disincentive against growth; many people will shrink their businesses to avoid the issue or simply shut down.

Moreover, a much larger number of businesses will be affected by the MFA than is commonly known. Remote sellers under the act most visibly include online retailers and catalog sellers. But the act will also apply to remote vendors, manufacturers and distributors who supply retailers. Many of our suppliers, for example, would not qualify for the small-business exemption and will face the same 45-state audit risk we do. Some of our suppliers also sell direct to consumers. They will be hit in the same way all remote retailers will. Their costs will need to be passed on, which will likely lead to higher wholesale and retail prices.

I strongly support the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota that no state may require retailers to collect sales taxes from online buyers unless the retailer has a physical presence in the taxing state. Physical location is the key and any attempt by other states to pass their tax-collection burden onto me is a grave threat to my business. The MFA is flawed legislation that doesn’t bring true simplification to the process.

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  1. […] The new audit risks will have me reconsider my business completely, and was the topic of my op-ed in the Wall Street Journal in August of […]

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