If you’re an online retailer, by now you’ve probably seen hundreds of articles discussing the supposed effects of the now-infamous Marketplace Fairness Act (MFA). We’ve noticed an interesting trend with these articles: The people that are most vehement and passionate about the MFA are those that oppose it.

What does that tell us about the bill?

We got a chance to discuss the hot topic with online retailer Susan Lindsey, a passionate activist against the passage of the MFA. If the length and depth of this article is any indication, we should really start to listen to those that feel most strongly about the Marketplace Fairness Act. And for more background info on the subject, be sure to stop by our Complete Online Sales Tax Guide.

Here’s what Susan had to say:

For some context and perspective, tell us a little about your business.

marketplace-fairness-act-sundryshopSundryShop is a small family business that has existed online since 1997. We consign and also buy collections, in addition to offering specialized consignment services to help seniors and families in distress. We’ve been fortunate to enjoy a high rate of repeat customers.

In order to better serve our customers’ needs, during the last several years, SundryShop invested family funds to create a unique database and Magento web store integration that permits better management of inventory for mutli-channel selling, a new format that we’ll be fully implementing in 2013.

Q: How do you think this whole online sales tax issue came to be? How do you feel about the proposed Marketplace Fairness Act and why?

Our concern with the Marketplace Fairness is that it originated because the retail giant, Wal-Mart, went to the Congressman Womach in their local district and sought out a way to thwart Amazon’s online growth.  By that time, most of the top big box retail giants, in addition to Amazon, were also selling online and already dominating over 83% of online sales, for which they paid sales tax because of their massive brick-and-mortar (nexus) presence throughout the country.

Even though Wal-Mart, which grossed over $464 billion in 2012, was significantly selling online, it worried that Amazon’s online sales, which were greater than $61 billion (a 27% increase over the previous year) was encroaching rapidly on Walmart’s overall retail territory.   The Act’s inception, therefore, represents a battle between two retail giants, with Amazon significantly dominating a significant portion of the 17% of online retail sales that has yet to be taxed.

Perhaps also pivotal to my opposing the MFA was that when I began reading about the history of the act, I found that online sales represent only 6% of all retail sales (approximately $224 billion gross), despite significant YOY growth.  Not only were the big box companies already dominating with 83% of these online sales and also paying sales tax, but that percentage could be expected to grow as Amazon increasingly establishes nexus, leaving an even smaller sliver for smaller online sellers who would be targeted and harmed by the MFA.

Q: If the MFA were to pass, how do you think the landscape for online retailers of all sizes would change?

While the MFA supporters have tried to create a dichotomy of online vs. brick-and mortar-retail, in reality, many businesses are now brick n’ click, particularly as smaller brick-and-mortar businesses have increasingly learned how to leverage their existing inventory to the web.

Brick-and-mortar businesses can afford to use online services because they are dealing with inventory that can be stored in their retail store and easily use pictures of products available to them through their suppliers and manufacturers.

Many now have their own web stores in addition to their  physical store. Therefore, the 17% of total retail sales online businesses must pay in sales taxes also includes many smaller “brick n’ click” businesses, with Amazon mostly being the very big, strictly online business exception that has now figured out a way to wiggle out of the MFA by paying the more business-friendly sales tax.

marketplace-fairness-act-emainstreetAs a member of eMainStreet.org, SundryShop has been strongly supportive of brick and mortar retail businesses expanding their selling arena through online selling. The importance of expansion to online selling by all smaller business is illustrated by the family-owned store, Tools Plus. Let me tell you their story:

Tools Plus began as a brick-and-mortar retail store on one side of the highway in Waterbury, CT.  When a large Home Depot was built on the opposite side of the highway and drew away many customers, Tools Plus began to sell on the internet in order to stay afloat.  When you look at the two hardware businesses from an aerial view, it is a David versus Goliath story, indeed!  In addition to offering low prices on the best power, hand, and stationary tools available, Tools Plus is an incredibly efficient, hard-working family business that employs around 7 people. Their profits are razor thin, to the extent that even though their cash flow could well put them over the $10 million mark, their net profit puts the family in the middle to upper middle class economic classification. Around 70% of Tools Plus sales now occur online.

The business detailed how the MFA would devastate their family business.  They simply could not afford the extra accounting help to collect use tax and remit it back to the home states of their out-of-state buyers.  Given the huge amount of time that the family spends working on site at the business, nor would they have the expertise or the the time to do so themselves.  Should the MFA pass, they anticipate that they would very possibly need to downsize their business through lay-offs and other cuts.  Indeed, the entire survival of the business might be threatened.  In contrast, their competitor across the highway, Home Depot, which has retail stores in every state, can simply continue paying the more easily paid sales tax for all online sales.

It is unknown exactly how many purely online, smaller businesses exist, but most are beneath the $1 million gross share mark.

Q: Do you feel there are any other implications of the passage of the MFA that don’t get widely publicized?

“1. Big business lobbying: Regarding the passage of the MFA in the Senate on May 6, 2013, perhaps the biggest bit of information that is not publicized is that the big box companies such as Wal-Mart, Target, Best Buy, Macy’s, Sears, and Home Depot lobbied the Senate with over $50 million. The lobbying figures were posted online but disappeared last week (but I can provide screen shots of the cached copies separate from this written response).

Not coincidentally, there is a strong relationship between the voting record of Senators and the lobby funds that they received.  Keep in mind that few Americans knew about the MFA and still do not at all.  Many online sellers are uninformed that this legislation is currently before the House, and the MFA has received little national syndication. Therefore, I don’t believe that many smaller businesses and the public in general understand that the MFA represents big business aligned with big government whose elected officials have accepted huge funds to support the MFA.

During our D.C. fly in on 6/25 and 6/26, members of eMainStreet.org heard from House members that big business is lobbying around the clock to get the act passed through the House.  How much will be spent lobbying with the House is unknown at this time.

2. The supposed financial benefits: While proponents of the MFA claim that the act will collect $23 billion of unpaid internet taxes, the $23 billion represents only the gross sales of the 17% unpaid internet sales tax. When you disqualify probably over ¾ of retailers because they gross less than $1 million, it leaves less than $2.5 billion untaxed internet sales.  And when you multiply that by an average of 8.5% sales tax and variably split the calculated use tax between 45 states, 600 Native American sales tax districts, and the territories, very little use tax will be actually collected by each state, so much so, that the AAA-CPA (a prestigious, neutral association) believes that the cost to smaller online businesses would be so great as to exceed the use tax collected.

marketplace-fairness-act-article

3.  ”Free” tax software for retailers: The fact that “free” software is available to only some of the web store formats is not very publicized. Also, for any available solution, coding merchandise according to the tax code across the country is extremely complex and must be done in advance to using the tax software and listing the merchandise for sale.

First, based on a phone call that I had with Tax Cloud CEO David Campbell, the “free” software currently only exists for fewer than 30 out of 287 web store formats.  An additional 10 web store formats could expect a solution if the MFA were to pass.  But that still leaves the majority of web store formats without a “free” solution.  Magento web stores, which now comprise around 40% of all web stores and remains one of the fastest growing web store platforms, is one example that has NO “free” solution and none in sight.  eBay owns Magento and offers expensive web store platforms.

Second, while the existing tax software companies and pro MFA advocates claim that existing tax software is “plug and play” and provide easy automation of use tax collection and submission, in reality they are not.  I spent a long time talking with Tax Cloud and learned that no software could be used without first identifying and coding the merchandise according to tax rules that amazingly differ from one sales tax district within states, let alone between states. This means hours of complex coding.

A shop like mine also couldn’t afford the accounting help needed to achieve accurate coding so as to avoid audits.  Having endured an audit years ago, SundryShop cannot fathom suffering multiple in a given year and having to fly to states in which we are unfamiliar with the laws to contest the audit.

Third, because we consign, not one of the Congressmen or anyone from the Americans for Tax Reform could tell us if the owner of the goods or the consigning business would report the use tax.  I believe that many consignors across the country, including those on eBay, are similarly dealing with this uncertainty.

Fourth, no tax software company nor anyone else with whom we spoke with could begin to explain how online businesses that multi-channel sell should collect use tax.  Again, multi-channeling is a pervasive online selling strategy for many smaller online sellers.  Few would be able to afford integration with one tax cloud solution, let alone multiple, different ones that, indeed, mostly don’t even exist at this time.

marketplace-fairness-act-taxTherefore, the entire pro MFA “plug and play” software spiel is deceptive and misleading, making the average American believe that a simple solution exists, when it is far from that.  In reality, no “free” software solution exists, nor are the current solutions able to deal with the many online business selling multi-channel, consignment, and via other selling formats. This is because if the MFA were to pass, the state taxpayers would cover the cost of the software usage in addition to certain audit costs.  That additional cost to taxpayers is unfair and contributes to my opinion that the whole bill is fiscally foolish.

Furthermore, while the existing tax cloud solutions proclaim that they’ll assume audit ownership and remedy if the software makes a mistake, the complexity of the tax code that must be entered by the seller makes it strongly likely that the seller will make mistakes and be subject to audits from 45 states.

4. Tax collection: Many believe that the MFA would force online sellers to collect their own sales tax.  That’s not the case.  All online sellers pay sales tax when in-state buyers purchase.  Rather, the MFA sets a new precedent in the collection of USE TAX by “remote sellers”, not “online sellers”.  And, contrary to what is commonly understood, the tax collection demands would have major ramifications for all smaller businesses, not just those that are defined as making $10 million or less, and would greatly hinder job growth.

I’m concerned that the MFA will establish a new way of collecting tax because out-of-state buyers (for various reasons) never declare or pay back to their home states.  Many buyers don’t know to do so and many simply forget or don’t do it. However, the tax matter really pertains to the relationship that the buyer has with their home state and not the seller.  Some states, like Michigan, have been able to pretty successfully come up with remedies that I believe could be shared and elaborated upon by other states.

Whereas it is difficult to identify these buyers with brick-and-mortar retail where most of the out-of-state buying occurs and where most of the remission back to home states never occurs, the out-of-state buyers are easily identified with online purchases.  Therefore, the MFA targets and discriminates against the online sellers in requiring that they collect and remit back to the buyers’ home states.

While the federal government classifies “small business” as making $10 million or less, the competitive nature of online selling is such that many online sellers competing against the big box companies experience difficulty becoming profitable until they reach $10 million gross sales, at which time they strongly struggle with capitalization needs that banks are too seldom willing to fund.

Bottom Line: Regardless of what cut-off point is used ($1 million as currently proposed, $10 million as proposed by eBay), the MFA would thwart growth beyond that point because many businesses would be compelled to hinder growth over taking onthe extra burdens and risk that comes with being subject to tax audits by 45 states.

Q: What have been doing lately in response to the proposal of the MFA?

marketplace-fairness-act-article-dcSundryShop became aware of the potential harms that the Marketplace Fairness Act would inflict on smaller businesses in April 2013.  We worked with another online seller to create an open group on Facebook on May 3, and, in order to establish a greater reach, switched to an open community on May 23 after joining forces with Drex and McKane Davis, who own ScrapBook.com.

We worked with them to help create the eMainStreet Alliance closed community page and the eMainStreet.org, which they now govern along with 3 other online businessmen.

For the last 4 months, SundryShop has worked relentlessly to help provide accurate information about the MFA, participated in the June 25 and 26 fly-in to Washington, D.C., contacted publications to make them aware of factual information, and communicated with Congress.  Separate from Facebook, we have responded to hundreds of emails requesting information about the MFA and have spent scores of hours talking on the phone with other businesses.

Get Involved: Helpful Links

In case you missed it, check out The Complete Guide to Online Sales Tax, updated regularly.

About the AuthorJon works as a Marketing Specialist at CPC Strategy. He loves to write, inspire, and make complicated stuff sound not-so-complicated. You can contact Jon directly at jon@cpcstrategy.com or follow him @Jon_Gregs. Also, the Chicago Bears are the best franchise in all of sports. See all posts by this author here.