EcommerceBytes-NewsFlash, Number 3077 - May 31, 2013     3 of 4

What the Online Sales Tax Law Means for eBay Sellers

By Kenneth Corbin

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With the passage of an online sales tax bill out of the U.S. Senate earlier this month, there has been growing concern across the ecommerce world about how life for online sellers would change if the Marketplace Fairness Act were to be signed into law.

There are few certainties, and supporters and opponents of the bill, of course, vary widely in their estimations of how much of a burden the proposed sales-tax collection requirements would actually entail.

Perhaps no single entity has been more vocal in its criticism of the Marketplace Fairness Act than eBay, which has been urging sellers to contact their representatives in Congress to voice their opposition to the bill in its current form. More recently, the company began sending out similar messages to shoppers registered with the site.

In a bulk email sent May 21, eBay CEO John Donahoe wrote: "This legislation, which has already been passed by the U.S. Senate, is being called the Marketplace Fairness Act, but I strongly believe it creates an unfair tax burden for small online businesses, a burden that will impact online shoppers."

In mid-June, the company is planning to dispatch seller Amy Weintraub, who runs the eBay drop-off and trading-assistant business SHOPitLA, to Washington to press that point in meetings with lawmakers.

"One of the main things that I want people to understand is that this is not about SHOPitLA competing against the little gift ship. Hopefully that small business gift shop is selling online - there's no barrier," Weintraub said in an interview.

"This is about small business competing against large bricks-and-clicks," she said. "I want to express that not only to the congressmen but also to other people, because people don't understand that."

That message stands in counterpoint to the defense offered by supporters of the measure, who argue that the Internet sales tax bill would level the playing field by eliminating a pricing advantage that online sellers, who generally do not have to collect the tax on out-of-state purchases, enjoy relative to their offline counterparts.

The version of the bill that passed the Senate would authorize states that take steps to simplify their tax frameworks to require remote sellers to collect and remit sales taxes on purchases made by their residents. Under current law, shoppers who live in states with sales tax laws are expected to report untaxed Internet purchases on their state income tax returns, but few do so. Estimates have put the revenue that states are missing out on from uncollected sales taxes at $23 billion annually.

So as a starting point, backers of the legislation note that the Marketplace Fairness Act would not amount to a new tax, but rather a shift in the collection requirements concerning one that is already owed.

But the debate gets sharper when discussion turns to the impact that the sales-tax requirements would have on online sellers. For instance, critics of the bill note the existence of more than 9,600 distinct state and local tax jurisdictions throughout the country, a bureaucratic labyrinth that would pose a forbidding compliance burden for small sellers with limited resources.

On the other hand, the bill that passed the Senate would require states to provide sellers with free, certified software to handle the collection and remittance of the taxes. Such software is already on the market, and its purveyors tend to wave a dismissive hand when they hear critics talk in dire terms about the bookkeeping nightmare the sales-tax bill would create.

"I think it's just silly," said R. David Campbell, founder and CEO of FedTax, maker of the ecommerce accounting software TaxCloud. "One of the pieces of misinformation that's being put out there is that online retailers are going to have to figure out this stuff on their own."

FedTax offers its software to online sellers for free. Its revenue comes from the 24 states that have signed onto the Streamlined Sales and Use Tax Agreement, a multi-state framework for tax harmonization. Under the Marketplace Fairness Act, states would only be able to force remote sellers to collect the sales taxes if they signed on to the Streamlined agreement or took other, comparable steps to simplify their tax codes.

Campbell, who supports the legislation and acknowledges that his company stands to profit from its passage, contends that the argument about the multiplicity of state and local tax codes is a red herring. State-certified software that plugs into an online retailer's order-management system would automatically calculate the taxes for the various jurisdictions, sparing sellers the hassle of manually keeping track of the various rates, tax holidays and other complexities of the sales-tax landscape.

But the promises of automated software are small solace for sellers who see in the Marketplace Fairness Act a huge, looming set of accounting responsibilities that would divert scarce resources from their ecommerce businesses.

"I don't care how much free software they give me, there is no way I can account to the 9,000 different jurisdictions around the country," Weintraub said.

Importantly, the Marketplace Fairness Act includes an exemption for small sellers designed to spare mom-and-pop operations from the accounting burdens associated with the sales taxes. But that provision is another fault line in the debate.

The bill that passed the Senate would exempt businesses with less than $1 million in remote annual sales. eBay is pressing for an exemption of $10 million, while also sparing businesses with fewer than 50 employees.

"My gut tells me that a million is low. That's my gut," said Amine Khechfe, co-founder and general manager of Endicia, a firm that provides shipping solutions to ecommerce companies. "It would depend how automated things are."

There is also some confusion in the ecommerce world about the scope of the proposed legislation, suggesting that the small-seller exemption is not widely understood, according to Laura Messerschmitt, vice president of marketing at Outright, a provider of ecommerce accounting software.

Outright's typical client is a boutique seller with average annual revenues of only around $40,000. That's nowhere close to the threshold envisioned in the Marketplace Fairness Act, but many of Outright's clients have nonetheless expressed concern about the sweep of the legislation.

"Most of them wouldn't be affected by this, but they hear the news," Messerschmitt said. "I think it is confusing to them."

The threshold for the small seller exemption has varied in different proposals for online sales legislation, and that provision remains a focal point of debate around the bill that passed the Senate. That measure faces an uphill climb in the House, where it awaits consideration in the Judiciary Committee, whose chairman, Virginia Republican Bob Goodlatte, has criticized the Senate version of the bill for not going far enough to simplify states' tax codes audits, among other issues.

"If it does pass, it probably won't be in the format that it's currently in," Messerschmitt said.

Some sellers also worry that the bill could expose them to new liabilities should they be subjected to an audit from any of the new tax authorities to which they would have to report, a concern echoed by critics in Congress.

The Marketplace Fairness Act does include audit shields for sellers who use certified software, and also mandates that states consolidate their administrative and enforcement activities under a single entity. What's more, software providers like Campbell's FedTax, which coordinates directly with the states, position themselves as a buffer between sellers and remote tax administrators, handling audits along with their other compliance responsibilities.

But that's small solace to skeptics who wonder whether state tax administrators, in their hunger for revenue, could target remote sellers with aggressive collection actions.

"The states, knowing how they work, each one wants to have its own world, so you in turn have 50 new masters that have the opportunity to audit you," Khechfe said.

As a practical matter, Campbell countered that sellers using certified software are actually well insulated from state administrators, who typically conduct multi-state audits of software providers with a level of anonymity that masks the identity of individual merchants. Generally, states will only zero in on an individual merchant when they are investigating specific suspected fraudulent activity, he said.

That means that under normal circumstances, sellers wouldn't have any interaction with state tax administrators. Indeed, the way Campbell tells it, after the initial installation of the software, the extent of a seller's involvement in the tax process would be to review the returns that FedTax prepares for each jurisdiction, which are available to sellers at the beginning of each month, ahead of the filing on the 10th.

"The entire burden after you've got it set up would be returning to the website between the first and the 10th and taking a look at your return," Campbell said.

That rather breezy explanation doesn't sit well with Weintraub, who as a matter of due diligence imagines a time-consuming and labor-intensive process of combing through those monthly reports to square the information being reported to the states with her internal sales records.

"I'm looking at this as a small business issue," she said. "If you're a small business owner, it's your responsibility to verify that kind of thing."


About the author:

Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.


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