The “Marketplace Fairness Act (MFA),” S. 743, has passed the Senate, and an identical House version, H.R. 684, is now pending in the House Judiciary Committee. This legislation would require businesses to collect and remit state sales taxes on sales of goods and services made into other states.
This poses certain problems. For example, say a computer services company is headquartered in Virginia, but services clients in Maryland, Illinois and California. Even if the Virginia business never actually sets foot into these three states, that Virginia business would still be required to collect sales taxes from its customers, and file sales tax returns with Maryland, Illinois and California. If the Virginia business has customers in all 50 states, it would have to collect sales taxes and file returns with each of those 50 states.
Our main concern has always been that such compliance burdens would disproportionately affect small business. While the MFA provides an exemption for businesses having less than $1 million in out-of-state sales of goods and services, this exemption is just too low and fails to take into consideration that small businesses do not have a homogeneous composition across business models and industries.
The Small Business Administration has always recognized that one size does not fit all and has developed detailed size standards across industry types. For most computer services, the SBA definition provides that a business will be considered a small business provided annual receipts do not exceed $25.5 million. For value-added resellers, the SBA rules do not state a specific revenue limitation, but provide that an “information technology value-added reseller” will be considered a small business provided it has 150 employees or less and its revenues consists of at least 15 percent and not more than 50 percent of value-added services – as measured by the total price less the cost of information technology hardware, computer software and profit.
Just this week, a paper published by economist Jonathan Orszag, senior managing director and member of the executive committee of Compass Lexecon, who formerly served as economic policy advisor on President Bill Clinton’s National Economic Council, addressed the MFA small business definition. He noted that the“definition of small business in the MFA is not supported by any available empirical evidence.” Orszag also noted, “If the MFA’s definition is set too low in some retail sectors, it will impose so-called transactions costs (or compliance costs) on some businesses.”
We continue to believe that the MFA should provide an exemption determined according to whether an entity is a “small business.” We believe that the current “small seller” exemption misses the mark. As a policy issue, the MFA’s one-size-fits-all approach fails to recognize the vast differences among small businesses operating in different industry sectors using difference business forms. As a practical issue, even if proponents of the MFA insist on a static revenue limit, the $1 million threshold is just too low.
In an earlier blog, we stated that the threshold should be at least $5 million, as adopted in a draft interim report, dated December 8, 2008, prepared by the Small Seller and Vendor Task Force of the Streamlined Sales Tax Governing Board.
While the fate of this legislation remains uncertain in the House, more small businesses need to speak out about how the MFA will severely increase their tax compliance costs. Learn how to do so at TechVoice.
