Will The Internet Sales Tax Put You Out Of Business?

January 24, 2013 | By

HR 3179, also known as the Marketplace Equity Act, has been getting substantial press lately, and it’s easy to see why. The bill would give states authority to force online retailers to collect sales tax. Brick-and-mortar businesses feel that the bill would end an unfair advantage that online retailers have over them. Online retailers are threatened by the effect the bill would have on their already razor-thin margins. What does HR 3179 mean for your business?

History of HR 3179
Originally sponsored by Rep. Steve Womack (R-AR), the HR 3179 was introduced on October 13, 2011, and was co-sponsored by 53 representatives from both Republican and Democratic districts. On July 24, 2012, the U.S. House of Representatives Committee on the Judiciary held a full committee hearing to explore the bill. During the day’s testimony, most of the committee members agreed that brick-and-mortar retailers are currently operating under unfair conditions as far as tax laws are concerned, but the committee never came to any consensus about how to solve the issue.

Small Businesses Exempt
HR 3179 states that small online businesses are exempt from the new tax restrictions, but how is a small online business defined? Under HR 3179, small online businesses are defined as businesses with a total gross annual income of less than $1,000,000 or with annual sales to particular states that are less than $100,000.

Some small businesses will easily fall under the total gross annual income limits defined in HR 3179, but many others won’t. Critics of the bill also point out that as internet retail expands over the years and inflation raises prices, the dollar limits in the bill will exempt fewer and fewer small businesses. But that’s not the only criticism of the bill.

Complicated Tax Laws

The United States is not divided into just 50 state tax jurisdictions; there are about 9,600 tax jurisdictions in all when you include cities, counties, and other jurisdictions, and these thousands of tax jurisdictions all have different rates and rules. Los Angeles County, for example, charges 8.75 percent sales tax, but Orange County charges 7.75 percent. What does this have to do with HR 3179? If the bill passes, the states will have an added layer of tax complexity to deal with, but they would not be forced to simplify tax rates. And since the bill doesn’t establish federal court jurisdiction for simplification standards, there could potentially be 50 contradictory state court rulings.

This doesn’t bode well for small businesses that sell to customers in multiple states. Tax collection would be complicated, and the complexity would require time and resources to sort out.

Effects of HR 3179 on Online Businesses
Could HR 3179 put you out of business? It’s conceivable that if you’re already barely making ends meet and HR 3179 drives your customers away (meaning they won’t shop from you if you charge sales tax), you could potentially go out of business. But if your current business plan provides for so little protection against adverse conditions, perhaps it’s time to rethink your business strategy.

Rethinking Business Plans
Much of the appeal of online shopping has been the lack of sales tax and the increasingly prevalent online shipping, which Amazon has offered for years. Between no sales tax and free shipping, consumers rarely need to leave the house; they don’t even have to spend gas money to go to a shopping center. This advantage has spurred the growth of online small businesses, but if HR 3179 passes, some small businesses may have to reconsider their business plans.

If you have to start charging tax on the items you sell, what other benefits can you offer your customers to make up the difference? Are your products not readily available in brick-and-mortar stores in their towns and cities? Can you customize your products in a way that makes them exclusive or one-of-a-kind? Is there a way to provide stellar customer service online that beats out the customer service they receive from other businesses? What do you have to offer that they can’t get anywhere else? Successfully answering these questions can prevent HR 3179 or any other top-down ruling to determine your fate. Let’s take a look at some of these questions more closely to get you thinking about how you can adapt your business to changing circumstances. It’s not in any way certain that HR 3179 will pass. In fact, GovTrack gives HR 3179 only a 10% chance at being enacted. Regardless, it’s always a good idea to position your small business so that it’s protected from outside forces such as fluctuating tax laws. Think about your business and concretely answer the following questions:

What benefits can I offer to my customers? Let’s say you have a seed catalog, and you compete with local nurseries. What will make them want to buy from you? Do you offer a wider variety of products than a nursery can manage? Do you have a website with a helpful blog or YouTube demonstrations?

Are my products not readily available in brick-and-mortar stores in my customers’ towns and cities? A brick-and-mortar store can offer only as many products as they have room for. Perhaps by specializing in a certain product, you can become the go-to supplier for exclusive items. Sell automotive accessories? Specialize in hub caps, and when somebody needs a particular hubcap that can’t be found in their local brick-and-mortar store, they’ll come to you.

Can I customize my products in a way that makes them exclusive or one-of-a-kind? Instead of selling generic iPad cases, embroider monograms on them or silkscreen favorite photos onto them. These customized products not only give you an edge in originality, but they allow you to raise your prices.

Can I provide customer service that’s superior to my competitors’ customer service? Brick-and-mortar stores are open for a certain number of hours every day, but you can be open all the time. Can you offer support unique to your online or catalog platform? Perhaps your website could offer question and answer sessions, craft instructions, or online discussions about problematic business problems that would be helpful to all of your customers.

What do I have that they can’t get anywhere else? Taxes or not, you want to be able to offer your customers something they can’t get anywhere else. HR 3179 may take a bite initially, but if you focus your efforts on giving your customers a pleasant, unique experience with your products, taxes will only effect you minimally.

HR 3179 may or may not affect your business at all. The wheels of Congress move slowly, and you may never have to worry about sales tax taking a bite of your profits. Even if HR 3179 doesn’t pass, though, worrying about it may just be the motivation you need to improve your business plan. Prepare for the future now by considering how you can make your business indispensable to your customers. If you do this, a change in tax law will be a minor inconvenience instead of a breaking point. What are you doing now to prepare for the possibility of the enactment of HR 3179?

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Tony is working on new client relationships and the expansion of present accounts.

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