The Death of Ecommerce Startups?
By Jeff Sayre
The last mentioned opportunity is actually not a startup yet as I am in the information-gathering stage. Whether I decide to promote it to a viable startup depends on the results of what I call my startup due diligence process.
Red Flags A Waving
As I’m going about the process of due diligence with this concept — determining whether or not this opportunity makes business sense — a big potential red flag has become apparent. This year or next, there might very well be a massive headache with respect to collecting online sales tax from out-of-state customers.
Since the inception of ecommerce on the Web, online sales have been exempt from state sales tax — with the exception of the state(s) in which you have had a physical presence. It is believed that this respite from the burden of having to comply with the varying taxing laws of hundreds (thousands) of different taxing authorities helped skyrocket the success of the Web as a business platform.
But if various state governors get their way and manage to persuade the US Congress to implement an out-of-state sales tax, it could be curtains for online retailing — at least the startups and small to medium sized etailers. Why?
If some form of this legislation gets signed into law, online ecommerce sites would be required to determine the proper sales tax owed by each customer based on the geographic location in which they reside and then collect and remit taxes to each of those taxing jurisdictions. Since there are literally thousands of different taxing authorities in the United States, that would be a hellish burden. Remember, this is compared to an in-state, Brick-and-mortar retailer who collects at just one state and one local sales tax rate.
Benefits Derived Versus Payment For Nothing
In theory, both online and brick-and-mortar businesses receive some benefit from state and local government services and programs. However, that is only if they are physically located in the jurisdictions of those governmental entities. What kind of relevant, realistic benefits and services would an online business receive from the hundreds or thousands of out-of-state taxing authorities to whom they may soon be forced to remit sales tax payments?
Let’s look at this from the standpoint of a brick-and-mortar store (B&M) being required to charge a sales tax based on the state and county of each of their customers. Although most customers of B&Ms are likely in-state, local citizens, many B&Ms have customers from different counties within the state, and different states. What if these B&M retailers had to ask each customer their home address and then make sure they charged the proper state and local sales taxes for that customer? They would then have to remit the sales tax to each state and local authority.
How many small mom and pop shops would be able to comply with that requirement? How many people would decide not to open up a new business, or expand into a new physical location in another state, if they were under the same onerous taxing rules?
Legally-legislated Enforcement Money?
Requiring online etailers to monitor, collect, and remit out-of-state sales tax is tantamount to the days of gangs and mobs charging local shop owners enforcement money. If the shops kept paying the money, the mobs would not hurt the owners nor shut down their businesses. Other than those benefits, they did not truly derive any useful services in return for monies paid.
Yet that is exactly what this legislation will amount to for tens of thousands of small- to medium-sized etailers. They will be forced to collect and remit payments with no benefits received in return — other than the promise of not being fined, sued, or shutdown.
The threat of a nightmarish onslaught of paper work may very well make me decide not to pursue this startup concept. The regulatory overburden might cause other ecommerce startups to fail, or not even get out of the starting blocks. It could be the end of ecommerce startups.
How Likely Is This Threat?
There is proposed legislation in the US Congress by Senator Mike Enzi (R-WY) that would reverse the legal precedent set by the Supreme Court that exempts online and catalog businesses from having to collect out-of-state sales tax. According to this resource, in past rulings that dealt with the issue of out-of-state collection of sales tax, the Supreme Court has basically stated that:
…the interstate commerce clause of the Constitution bars a state from compelling an out-of-state retailer from collecting taxes on sales to its residents…that collection is a burden on interstate commerce…[and] that taxes must be fair and nondiscriminatory, that there must be substantial nexus with the jurisdiction and a relationship between the tax and any state-provided services.
Requiring out-of-state businesses to manage the collection and remittance of in-state sales tax would cause an undue burden on the etailer — a burden that would not come with any viable, tangible, or reciprocal benefits.
If passed, this law would make etailers cringe each time they obtained a new customer that came from a state or locale to which they had previously not sold anything. With each new geographic location served, additional paperwork, sales tax remittance checks mailed, and compliance monitoring would be required.
In an attempt to provide a simplified method for collecting sales tax, some legislators have proposed what they call a Streamlined Sales Tax Agreement (SSTA). Would this make it easier for out-of-state retailers to comply with this new law? Not really.
Also from the above linked-to resource:
To start with, mandatory tax collection under the SSTA would cause thousands of merchants throughout the United States to be confronted with the entirely new obligation of collecting tax for over 7,500 local tax jurisdictions (including school districts, transportation districts, sanitation districts, sports arena districts, etc.) This will create an enormous increase in the complexity of doing business for interstate marketers –certainly not a move towards simplification.
To make matters worse, the drafters of the SSTA failed in their original mission to reduce the number of tax jurisdictions. Under the terms of the SSTA, the number of tax rates could actually increase to over 15,000 (each tax jurisdiction is permitted to have two rates).
Even with the proposed Streamlined Sales Tax Agreement, etailers would have a massive tangle of red tape and paperwork to figure out and stay up to date on. It would essentially be an overly costly, impossible task.
To Etail Or Not Etail?
As I was going through my startup due diligence checklist, the issue of taxes came up. After a little research, I learned that the promise land of the etailing space might soon be corralled by the myopic acts of local, state, and federal legislators.
If you are concerned about the very-real possibility of this narrow-minded legislation, please contact your local, state, and federal officials and express your support for a fair across-the-board sales tax policy for all retailers. If etailers have to collect out-of-state sales tax from their customers, then so should brick-and-mortar retailers.
Better yet, let’s keep innovation on the InterWebs alive and well by siding with the Supreme Court on this issue. Taxes should only be collected and remitted in return for direct, tangible benefits from local and state government.
Thanks to this resource for the copyright and royalty free piggy bank image used as the foundation of the above graphic.