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Small Business Definition Questioned In US Internet Bill

by Mike Godfrey,, Washington

14 October 2013

In a paper funded by eBay, Jonathan Orszag, a former economic advisor to President Bill Clinton, has put in doubt the definition of small business in the Marketplace Fairness Act (MFA) that is currently before the United States Congress.

While, under the current tax system, retailers are only required to collect sales tax in states where they also have bricks-and-mortar stores, the MFA would give states the option to require online retailers with national annual sales greater than USD1m to collect the tax, even if the websites lack a physical presence in the state.

Orszag finds that the definition of a small business in the MFA at a level of USD1m in sales "is not supported by any available empirical evidence," and that there is, in fact, no such standard definition in other Federal Government programs. Some opponents of the bill, such as eBay, would like to see it increased to USD10m.

He points out that the US Small Business Administration (SBA), the authority on business size standards, has allowed the threshold for what is (and what is not) a small business to vary by industry. For example, the SBA definition uses employment size of a firm as the defining factor for certain industries and average annual sales over the previous three years for other industries. Any mail-order retailer with sales of less than USD35.5m is considered a small business under the SBA's definition.

In any case, he states: "The definition of small business in the MFA does not allow for any such variation by industry, which is inconsistent with the differences across retail businesses and sectors and thus the economic logic underlying the SBA's existing rules."

In addition, Orszag adds: "No publicly available data suggests that USD1m in out-of-state annual sales – as opposed to some other dollar amount – differentiates appropriately between small businesses. It is very likely that many small businesses under the extant SBA rules would be 'large' businesses under the MFA's definition of a small business."

He concludes that, "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. And if it is set too high for other retail sectors, the MFA will not achieve its stated purpose. … If Congress and the President want to establish a MFA safe harbor for small businesses, it would seem like using thresholds based on, and consistent with, SBA regulations would make more economic sense, especially since such definitions allow appropriately for differences across industries."

TAGS: compliance | tax | small business | business | sales tax | tax compliance | commerce | law | internet | e-commerce | legislation | United States | standards | regulation | retail

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