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Study Reviews US Online Sales Tax's Small Seller Exemption

by Mike Godfrey, Tax-News.com, Washington

26 November 2013


The United States Small Business Administration (SBA) has published research analyzing the number of firms that will be affected by the small seller exemption (SSE) if current provisions of the proposed Marketplace Fairness Act (MFA) are adopted by Congress, and how much e-commerce is likely to be affected.

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 the USD1m SSE to collect the tax, even if the websites lack a physical presence in the state.

A version of the MFA was approved by the Democrat-led Senate in May this year and sent for approval to the Republican-led House of Representatives, where it has encountered a great deal of opposition. The MFA has mainly encountered criticism for the additional tax compliance costs it would impose on businesses.

According to the US Census Bureau, online sales accounted for only around 5.3 percent of total retail sales in the second quarter of 2013, but states wishing to impose the tax recognize that such sales are expected to grow significantly in the future.

Entitled "An Analysis of Internet Sales Taxation and the Small Seller Exemption," the SBA's research calculates that 974 of the Internet Retailer Top 1,000 companies have sales exceeding USD1m. Accounting for the possibility that some larger firms are not included in the Internet Retailer data, it provides a more realistic estimate of just over 1,800 online retailers that could be subject to the requirements of the MFA. In either case, it is emphasized that the number of included retailers is a very small fraction of all online sellers.

However, while it is found that an SSE of USD1m would also subject only a small share of business to the internet sales tax (less than 4.5 percent of electronic shopping and mail order houses, and less than 2 percent of all non-store retailers), the volume of sales transactions subject to the tax would represent 57 percent of total US online retail sales. In fact, while a higher SSE of USD5m would affect an even smaller share of online retailers, the share of online sales affected would remain near 57 percent.

A higher SSE threshold would therefore exempt a slightly larger number of retailers but still capture the majority of online retail activity. Conversely, a lower SSE threshold includes more companies but does not add measurably to the covered share of total online retail.

However, the uneven sales tax collection playing field in the current environment complicates policy decisions, as many firms that sell online also collect sales taxes for the states in which they have a physical presence. That has obviously helped many small traders that have a presence on both the internet and physically, at the expense of small retailers trading only physically.

The SBA concludes therefore that an SSE provision could reduce overall administration and compliance costs for small online merchants, but it would also reduce the potential revenue gains to state and local governments by exempting a large portion of online sales from taxation. Nevertheless, with an SSE, vendors trading only physically – small and large alike – would still continue to be disadvantaged relative to many online and mail-order vendors that would be protected by the exemption.

TAGS: compliance | tax | business | sales tax | tax compliance | commerce | internet | e-commerce | United States | retail | Tax

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