Compliance is Literally Impossible for Our Small Businesses

[intro]"The word “Fairness Act” is just a marketing tool used by politicians that receive money from large companies. The large companies just want the small companies like mine to disappear..." [/intro] Thomas Carlson

By Thomas Carlson ,

In 1999 I was employed as a Federal Agent.  I wanted to find a  way out of a career where I had supervisors and a job that controlled my life.  My wife had a Master’s Degree in Gerontology (the study of aging).  We saw the Internet as a new and exciting way to try to become entrepreneurs.  We created a company called Assisted Living Store, Inc., and started selling adaptive products that would assist the elderly and disabled to perform daily living activities easier.  It took us eight years until I was able to quit my federal job and pursue our Internet business full-time.  My wife had stayed at home during this time providing daycare services for others while raising our children.  We used the money from her daycare to fund the entire Internet business.  We had no financial backing and started our business from scratch.

In 2006 we moved the business out of our basement and purchased a warehouse in South Saint Paul, Minnesota.  We decided to expand our business and import our own line of products.  Most of the items we sell are exclusive to our company.  We are still a 2 person company today.  Our children do help out when needed.  We as a family handle all aspects of running the business.  We import our own items, do all of the accounting,  unload 20′ full containers of product, answer the telephone, do the web design, take all of the photos on our websites, pack and ship all products, manage the warehouse, and the list goes on and on…

The MFA will require us to make some decisions on the future growth of our company.

Small Seller Exemption less than $1 Million

According to the language in the pending act a “remote sale” means a sale into a State in which the seller would not legally be required to pay, collect, or remit State or local sales and use taxes unless provided by this Act. We would still not legally be required to pay, collect or remit sales taxes on a portion of our sales where the items were to be resold, are tax exempt items, or purchased by tax exempt organizations. Therefore, these are not considered “remote sales.” A State is authorized to require a remote seller to collect sales and use taxes under this Act only if the remote seller has gross annual receipts in total “remote sales” in the United States in the preceding calendar year exceeding $1,000,000.

The complexity of determining eligibility for the $1 million exemption is a major road block for this legislation.  No software exists that a company can simply plug into to determine if, in fact they are exempt of not.  Even if the software becomes available it assumes that a growing business approaching the $1 million in gross sales has the resources to plug their accounting system into the software.  In addition, how can a company that is approaching the $1 million in sales compel tax exempt organizations to provide exemption certificates if they are not being charged sales taxes in the first place?  According to the legislation free software is available to those that collect the tax but not for those that are trying to determine if they are exempt or not.

Complexity Access to Internet and Computer

According to the language in the pending act States must, “Provide software free of charge for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed..”  

The calculation of sales tax is impossible for traditional mail orders.  We do have customers that purchase our items via traditional mail order.

Many people do not have access to computers or the Internet. This includes many low-income people and the elderly. Many of these people still order their products from mail order catalogs. Many Internet companies also offer offline options to order their items via traditional mail order. In order to accurately calculate the sales tax owed on their purchase these groups would need to have access to the Internet and calculate the sales taxes due when they write their check for payment.  Since each state, county, city and Indian tribe has taxing authority this would be impossible to actually calculate the tax due on each item. The mail order catalog would have to have a complex set of taxes broken down by each zip code and taxing authority in our country.

The Marketplace Fairness Act is too complex and is discriminatory in nature to the elderly and low-income individuals. It assumes that sales tax calculating software is available for everyone.

Enforcement of the Law (Scheme or Device)

According to the language in the pending act, “Persons with 1 or more ownership relationships shall also be aggregated if such relationships were designed with a principal purpose of avoiding the application of these rules.”

In my former career as a Senior Special Agent with the U.S. Department of Agriculture Office of Inspector General (OIG), my primary criminal investigations involved individuals circumventing the farm payment limitation provisions. This legislation will create many “sham” entities (similar to the farm program) where businesses will be set up under other people’s names to avoid exceeding the $1 million limit. You will be creating new legislation that will require massive amounts of tax money to enforce the provisions.  Who will enforce these laws? 

When companies approach the $1 million in “remote sales” many small companies will ask  “friends and/or family” to create “drop ship companies.”  Therefore, creating a legally “separate” ownership relationship.  If they go over $1 million in “remote sales” they would be penalized $70,000 the following year (assuming an average 7% sales tax).  If you go one penny over $1 million under this pending legislation the company would be forced to collect the sales tax the following year on “all” sales.

The company that is approaching the $1 million limit might do the following:

  • Acquire a reseller exemption form from their “friends and/or family’s” business.
  • Shut down the shopping cart feature on their website and refer all of their business to their “friends and/or family” website.
  • Then fulfill the order for their “friends and/or family’s” business in a drop ship arrangement.

As in the USDA farm programs many people will find legal and illegal ways to get around the rules if a limitation is implemented.

Extra Accounting Time & Costs

Our company handles all of our accounting in-house (my wife).  She also answers the phone to take orders and to answer many questions each day.  The extra burden of the MFA on our company will force us to reduce our sales because of the extra time involved with complying with the new proposed requirements.

Audits from Other States

We expect to be audited by aggressive tax collectors in other states if the MFA legislation becomes law.  We are not afraid of what the audit will show BUT are afraid of the potential time involved handling such audits.  How many states will audit us each year? We would have to shut down our website while my wife and I waste our time with another States tax issues.

Mom & Pop, Brick & Mortar Companies

You still will not receive more sales by making Internet companies charge sales taxes. Why?  You are selling another companies product as a dealer.  The dealer network forces competition amongst dealers and it leaves no wiggle room on margin.  To combat this the Minimum Advertised Price (MAP) laws evolved.  This is where manufacturer’s tell their dealers that they cannot advertise their products below a certain price.  This is very common.  This puts off the perception to the consumer that it is cheaper online because no sales taxes are added.  The truth is you can always negotiate a lower price on the item, but you cannot advertise it.

In about five years you will see a new wave of Internet companies like mine that will be importing and selling direct online.  The 7% advantage you say online companies have now will be minor in compared what is to come.  No-one can tell an importer that sells direct to have a MAP.  The key to small retail success is to create your own style of products and stand out from the crowd.  Make your items slightly different so people are not just comparing the price but they are also comparing uniqueness of your products.

Small brick and mortar companies started to disappear when large big box companies moved in and crushed your companies long ago.  Get online and sell your items too.  Create your own brands and corner your niche in the market.

Please call your Congressman and ask them to vote against the Marketplace Fairness Act.  Nothing is really “fair” in life.  The word “Fairness Act” is just a marketing tool used by politicians that receive money from large companies.  The large companies just want the small companies like mine to disappear.

View the original blog post and full story at his blog.