Cracks in objections to Internet sales taxes

May 7, 2013: 10:45 AM ET

Some say collecting and remitting sales taxes would be too complicated and expensive for smaller businesses. But that doesn't seem to be the case.

130429224055-t-ebay-internet-tax-00010202-340xaFORTUNE -- Taxes on Internet sales have been talked about since the birth of e-commerce. In those early web days, one major objection was that taxes would be impossible to collect, given all the various local and state sales-tax regimes. Forcing merchants to adhere to the laws of thousands -- or dozens if only state sales taxes are considered -- of jurisdictions would have made it impossible for even the largest online store to do business.

Developments in software and services have long since solved that problem, but you wouldn't know it from the protestations of eBay (EBAY) CEO John Donahoe. He claims that the Marketplace Fairness Act -- passed by the Senate on Monday and now on its way to the House -- is unfair because of the burden it would put on small businesses. By that he means businesses with less than $10 million in revenue or fewer than 50 employees. He's OK with enabling states to collect taxes from companies larger than that.

The bill would exempt retailers with less than $1 million in annual revenue, which would include most eBay merchants. The bill provides a framework for sellers to collect and pay the taxes. While many jurisdictions already require that consumers pay taxes on Internet purchases, those requirements are usually ignored.

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Ebay is pretty much alone among big companies in opposing the tax, ever since Amazon (AMZN) recently signed on. Before that, the non-taxation of Internet sales was often referred to as "the Amazon loophole," so strongly did the company oppose such taxes. Big retailers like Wal-Mart (WMT) and Target (TGT) of course support the legislation, as it would put them on a more equal footing with online merchants.

Donahoe told NPR on Monday that remitting taxes to all those different jurisdictions would be too burdensome for those "small" companies. "If it's allowed to play out, things will still sell in eBay marketplace," he said, "but it will be larger and larger sellers that are doing the selling, and the small guy will, over time, slowly be squeezed out."

Unlikely. The "small guy" will have access to all kinds of help, including from services like TaxCloud, Avalara, Exactor and others, often at low cost or even no cost. In an open letter to Donahoe, the Marketplace Fairness Coalition, composed of retailers like Best Buy (BBY), Target, and Amazon, noted that "basic software currently available in the marketplace today makes it easy for sellers to calculate any state's sales tax with a simple click-of-the-button and the Marketplace Fairness Act requires states to provide such software to businesses free-of-charge." The bill would also limit liability for those merchants using such software.

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The New York Times' Andrew Ross Sorkin noted last month that the bill could create "a cottage industry of companies that will offer services to collect the tax, including eBay, which has made a reputation trying to streamline the selling process for merchants."

The Senate passed the bill on a bipartisan vote of 69-27, but it faces a challenge in the House, where "taxes bad" is the extent of many Republican lawmakers' thinking. The effort in the House to pass a similar measure was introduced by a Republican, Steve Womack of Arkansas (home of Wal-Mart) and has the support of lawmakers on both sides of the aisle. But Tea Party-backed Republicans such as Bob Goodlatte of Virginia have voiced objections over the bill's "complexity." Majority Leader Eric Cantor, also of Virginia, hinted that he might move to make big changes to the Senate version, but it's not yet clear what those changes might be. He hasn't yet set a date for a vote.

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