Amazon.com wants to bring order to the way online retailers collect state and local taxes. And that has Web entrepreneur Stacy Strawn feeling anxious.
Under a 1992 Supreme Court ruling, online retailers including her aren't required to collect sales tax for purchases made in states where they do not have a physical presence.
Stacey Strawn says proposed online sales-tax rules would hurt her Silver Gallery: 'The big retailers will eventually take over online shopping.'
Amazon is backing new sales-tax proposals but some small businesses are worried it may hurt them in the end, Stu Woo reports on digits.
But Ms. Strawn, and others like her who operate with just a dozen or so employees, would have to begin collecting and remitting taxes for the more than 40 states that currently charge sales and use taxes, along with thousands of cities and counties across the country, as set forth by a Senate proposal unveiled last month.
That proposal, which has the support of Amazon, includes an exception for small-business retailers with less than $500,000 in annual "remote" sales—a sum so low that it wouldn't even cover Ms. Strawn's employees' wages.
"These are the most small-business-unfriendly measures I've seen in years," said Ms. Strawn, whose Waynesboro, Va., store, Silver Gallery, sells sterling-silver bowls, cups and jewelry. "This is going to cost us big."
Ms. Strawn isn't entirely sure what the cost to her business would be. A 2006 PriceWaterhouseCoopers study found local and state tax compliance costs small retailers 13.47% of all sales tax collected, compared to 2.17% for large retailers.
The concerns voiced by Ms. Strawn and other small online retailers highlight a new point of contention in the debate over taxing Internet sales—the so-called small-business exemption in federal proposals is now so small that even many small fry aren't protected.
"The Internet is the only place where someone like us can be next door to an Amazon," Ms. Strawn said. "If they don't do something, the big retailers will eventually take over online shopping. And that would be a huge loss."
Nearly all of the Silver Gallery's $3 million in revenue last year came from online sales. The store currently has seven full-time employees, but she may have to cut some jobs as a way to deal with the added costs.
Legislation that would require online retailers to collect state taxes has been proposed in each of the past seven Congresses, including House and Senate bills in 2007 that set the small-business exemption at a much more generous $5 million in annual sales.
Amazon's willingness to get behind the proposals—combined with pressure from states for new sources of tax revenue, and bipartisan efforts in the House and Senate—has given the movement more traction this year.
Last month, the world's largest online retailer expressed support for a Senate bill calling for standardized federal rules that would require online retailers to collect out-of-state sales taxes—with a $500,000 exemption for small retailers. Paul Misener, Amazon's vice president of public policy, said at a House Judicial Committee hearing Wednesday that any small-business exemption must be kept low to protect states' rights to collect taxes, while leveling the playing field between online retailers and their brick-and-mortar competitors that already collect state taxes—typically reflected as higher sticker prices. "No one should want these online sellers to take advantage of a newly created un-level playing field over small Main Street businesses, and no one should want government to pick business-model winners and losers this way," Mr. Misener said.
"Amazon is prepared to make its technology available as a service to help sellers by collecting sales tax for them," he added.
Other supporters of the proposals include brick-and-mortar-only retailers who believe the standardization will help create a more level playing field overall in the retail industry. Without a state sales tax, online retailers "have nearly a 10% discount automatically," contends Maggie Jetter, owner of Tweed Baby Outfitters, a baby goods and apparel store in Nashville, Tenn., that doesn't sell its wares online. "We're doing the same thing, offering the same products, so the law needs to be reformed and updated," she says.
Online retail sales in the U.S. grew 13% to $176 billion last year, and are expected to grow by 12% to $197 billion in 2011, according to Forrester Research.
The University of Tennessee estimates that states and local governments will lose up to about $12 billion in 2012 from uncollected sales taxes.
Tod Cohen, vice president, eBay Government Relations, said in testimony Wednesday that the company believes the U.S. Small Business Administration should be the one to determine which small business retailers would be exempt. Forcing small businesses to take on the same costs and tax burdens as national retail businesses is unrealistic, unfair and will "unbalance the playing field" between giant retailers and small-business retailers on the Internet, Mr. Cohen said at Wednesday's hearing.
The SBA defines most small retailers as those making less than $7 million in annual revenue. In some categories, businesses such as women's clothing, book and games stores are considered small businesses if they have revenue of less than $25 million, according to the agency.
Some small and midsize retailers argue they may have to raise their prices to cover the costs of complying with a slew of new state taxes, under the proposed standardized federal rules. The risk is that shoppers looking for the best prices may then move their purchasing to larger sites that can absorb the added costs, said Joe Sponholz, president of BabyAge.com, a Wilkes-Barre, Pa.-based online baby products retailer with 29 full-time employees.
"It's not the start-ups or the Amazons of the world you have to worry about here. It's all the guys in the middle," said Mr. Sponholz, whose company recently built a distribution center in Nevada rather than California, to avoid paying state sales taxes. He says the $500,000 sales limit will only help very small retailers who have yet to develop a truly national reach.
A House bill introduced in October is also limited in the number of small businesses it would exempt. It makes an exception for those whose out-of-state sales are less than $100,000 in any one state, or a total of $1 million nationwide.
—Stu Woo contributed to this article.