Legislation passed earlier this year that would levy taxes on Internet purchases made across state lines had an exemption for small businesses. A new congressional discussion, however, may prompt the removal of the clause.
The Market Fairness Act, which passed in the Senate on May 2013, requires web businesses to collect taxes on sales made across state lines. The intention of the bill was to level the playing field between online retailers and traditional brick-and-mortar businesses. The bill, however, did not apply to all businesses. During debates, many came to the defense of small online businesses, claiming that interstate transactions would be expensive and time-consuming to track reliably. Thus, it was agreed that those earning below $1 million annually would not be required to comply.
Now the bill is taking a new shape in the House of Representatives, and the small business exemption might not hold.
Rep. Bob Goodlatte (R-Va.) is heading the House Judiciary Committee, which leads the new legislation. He recently outlined seven principles to “guide discussion” and “spark creative solutions” in Congress. Among the principles was “Simplicity”, which stated, “laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary.” In other words, the defense that won small businesses immunity in the past – that collecting taxes would be difficult and unreliable – may no longer apply.
New software influences decision
Bloomberg Businessweek suggested that state-provided free tax software may have prompted the change of heart. The software is more readily available to help small businesses track their out-of-state sales tax. As David Campbell, CEO of FedTax, told the source, “we believe the small seller exemption is a relic from when the software was extremely expensive.” Campbell’s company provides tax compliance software for free.
But Rep. Ron Paul (R-Texas) does not believe that free software will make interstate sales tax a simple affair. “Any mistakes made by the software, or even errors in installing it, could result in a small business being subject to expensive and time-consuming audits,” he wrote in The Freedom Outpost.
Despite the committee’s statement, it is not clear whether or not the new legislation would tax small-time earners. The language of the committee’s statement does not specify if all businesses would be subject to the tax.
Small online businesses who are concerned about the new tax climate can consider a merchant cash advance to shore up cash flow if it is indeed taxed under the new e-commerce regulations.