eBay and the small business exception

In an email Sunday to 40 million eBay users, eBay CEO John Donahoe urged them to oppose the Marketplace Fairness Act unless the small business exception, which exempts online retailers with less than $1 million in out-of-state sales from collecting sales tax, is raised to $10 million or 50 employees.

We’re all for making sure small online businesses don’t have to spend time or money dealing with sales tax (that’s why we created TaxCloud in the first place), but here are three reasons that raising the exemption threshold doesn’t make sense:

1. At the $1 million threshold, most online retailers are already exempt. Nationwide, fewer than 1000 online retailers* have more than $1 million in total sales. (If we consider only out-of-state sales, that figure is even lower.)

2. Collecting sales tax doesn’t require the resources of a large company. The Marketplace Fairness Act requires states to provide free sales tax software and services for online retailers, so online businesses wouldn’t need to spend anything to comply with the bill.

3. Most small online retailers already use e-commerce platforms, which can easily provide add-ons that handle sales tax, just as they provide for shipping—making sales tax collection easy for all their retailers at once. And we’d lay odds that once states can require online businesses to collect sales tax, that’s exactly what they’ll do.

By exempting online retailers with less than $1 million in out-of-state sales, the small business exception already does what it was designed to do: ensure that small online businesses are not burdened by online sales tax collection. But raising the exemption threshold to $10 million or 50 employees would be a mistake.

*According to Internet Retailer‘s Second 500 Guide, only the top 980 online retailers in the nation had over $1 million in sales in 2011.

9 Responses to eBay and the small business exception

  1. FedTax says:

    Nice job on this.

  2. rick says:

    There are far more retailers than that doing more than a million a year in sales. Only retailers who want to share their sales figures can be in the list and a large number of sites don’t want to share. Most of my competitors easily surpass $1 million, none of them are in the guide.
    Amazon third party sellers aren’t in the list and there are a TON of them with more than a million in sales per year.
    Lots of larger Ebay sellers too.
    I can’t imagine what a nightmare it will be to implement this for our small company. And I have a hunch a lot of those same third party and smaller website sellers will just blow it off and not pay and collect the taxes.

    Of course a company that helps retailers detail with sales tax would be in favor of this legislation.. what a shock.

    • FedTax says:

      Do you only use eBay to sell, or do you use any other platforms?

    • Rick says:

      I use Yahoo and Amazon. I know off-hand dozens of retailers not in that list who could be. The IR list is not particularly accurate, especially lower in the list. Their numbers are a mix of self-reported and estimates. Most smaller online retailers have no desire to share their revenue numbers with lists like this. Nor would I.

  3. Ken Miller says:

    What do I think? I can only repeat myself. I’m so fed up with the greedy cities and states that can’t live within their means, and salivate like pigs at the trough to raise additional revenue so they can continue to pay their employes exorbitant pay scales along with productivity rates that would never stand up in the real world. Not to mention pensions that allow them to retire early and get a raise!!!
    Also, to the people who think that online retailers have an advantage due to no taxes, have you ever thought what it costs to ship these items to their clients? Depending on the item of course, I would, however, wager that it costs more to ship something than you save in taxes. That never seems to enter the equation in the discussion on costs for the shipper. These taxes only serve to protect from competition retailers who are not competitive in the first place, and allow the states and cities to collect a tax they have no right to.

  4. JM Jennings says:

    There are tens of thousands of businesses that will be adversely affected by this bill. MOST retailers do not list with IRCE as their Top 500 list is the first place patents trolls go to find targets. Yes… this is well documented and known by retailers.
    Also, this bill affects catalogers and direct mail sellers. To suggest otherwise is not only wrong, it’s dishonest.

    • FedTax says:

      Thank you for your comment. Unsure how to respond to your catalog and direct mail sellers comment – surely those businesses also have computers, so what is the basis of your concern?

      Before you reply with the tired argument that a catalog would have to print every possible taxrate in some sort of insert, let me remid you that catalogs are… (wait for it, this will seem blindingly obvious once pointed out) … Thats right, those catalogs are MAILED to the potential consumer AT AN EXACT ADDRESS. So, the catalog company could smply print the applicable sales tax rate in the mail-to address block. Every modern catalog seller already includes customer-specific codes in their address block – adding the applicable sales tax rate would be trivial.

      If you dont believe this, we would be happy to introduce you to dozens of printing companies that have already adopted our free TaxCloud APIs to do exactly that.

      Thanks again for your comment, and your participation in this important national dialog.

  5. Kali says:

    I am a small business remote seller (and honestly report my income). A number of our products are “drop shipped” directly from our distributor or manufacturer. Many of our vendors are now charging us sales tax on many states (CA FL TX NY to name a few) unless we have a reseller permit from these states–which of course is incredibly complex and costly to get–been trying now with CA for several months. We get charged taxes on our purchase plus 10%–then the state gets to collect sales\use tax from our customer! Double taxed! Evidently the states that didn’t join the sales tax agreement group can force even small resellers like me to pay their sales tax. In other words–no exemption for small business remote seller. QUESTION: if\when the Marketplace Fairness Act becomes law, will these states making me apply for their state’s reseller permit (and license to do business in their state) still be allowed to force me to comply even if I am exempt under the small business exemption? And second part: what about drop shipments? Many online retailers drop ship. How will that be handled?

    • FedTax says:

      Thanks for your note – and before we reply, we need to be very clear: We are NOT your attorney, accountant, or legal adviser in any way. WE ARE NOT PROVIDING TAX ADVICE OR RECOMMENDATIONS

      Regarding your first question (about states requiring you to register and collect sales tax), you should be insulated from such burdens because of the small seller exception of the MFA – but that only applies if you are truly out-of-state.

      Regarding your second question related to drop-shippers – most states consider drop shippers to be an extension of your operation, and thus create operating nexus in any state where you drop-shipper is located (so you will likely need to collect sales tax in those states).

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