The recent ruling by the US Supreme Court that allows states to go after businesses outside their jurisdictions to collect sales taxes on sales that occurred online has been hailed as a victory for small businesses, in that people believe it better allows them to compete with large online retailers. The thought is that if online businesses have to also collect the same sales taxes a local retailer must collect, then the local retailers are on more equal footing. However, this belief that the court decision is a victory for small businesses requires some outdated thinking.
The obvious trend is that it will only be a few years before the majority of all retail sales happen online. Consumer behavior has changed dramatically, and where people used to have reservations about buying many things online, it is becoming a normal shopping habit for most people. Over 80% of US households are members of Amazon Prime, Walmart delivers groceries purchased at their stores online right to your door, and small businesses participate in online business at a rapidly growing pace.
Granted, this activity has greatly reduced local sales tax collections in every city and state in the US. However, as things continue to change and as small retailers adapt as they will have to do, the burden of collecting and reporting sales taxes for 50 different states is a monumental task and a terrible expense. Where a huge business like Amazon or Walmart can easily afford an army of people to file all 50 reports on a monthly basis and the economy of scale is such that it is more doable, doing this as a small business is tremendously burdensome.
When it comes to the way people view small businesses and small business owners, ignorance is truly bliss. I have been the owner of a small retail business, and what people who have no exposure to small business really do not understand is how much time and expense is involved with tracking sales taxes – even for a single state and municipality.
All sales must be added up, tax exemptions subtracted, proof of those exemptions on file (making copies of tax exemption licenses) in an organized fashion for future audits, calculating which entities get how much of these taxes and filing reports for each of them, then writing checks to the entities (sometimes a state may collect taxes on behalf of municipalities, but not always). While most people just assume this is easy stuff that can be automated on a computer, affording this sort of automation and making it possible is a lot more expensive than you think. And, all of these expenses are a cost that have nothing to do with the purpose of the business. It is a drag on economic activity – no matter how large or small.
The effects of this ruling do not at all protect small businesses from the reach of large online retailers. Rather, it makes it more difficult to do business and introduces new hurdles. The thought process that assumes this is small business protection ignores the ongoing current trend in online retail. Large businesses aren’t the only ones doing business online, and if a small retailer doesn’t do business online, it can face ever-falling losses in sales.
There are big opportunities for small business online, unless there is a barrier to entry. In this case, that barrier is that a small business with very limited resources must do the same work as a large business with plenty of resources in order to stay relevant and in order not to die a death of not being able to change with the direction of consumers. Instead of protecting small businesses, this ruling assures the destruction of the small retailer. It makes it so that in order to afford to do business, a small business must either refuse sales to anything but a limited number of states or do enough business that they can justify doing business in all states (which is quite a high bar).
This ruling is a protection for the online giants of retail. As if they needed another advantage over smaller local retailers, the government has granted them yet another. A company like Amazon does derive significant sales from small, independent retailers, but it can easily, no doubt, adjust to recapture those sales with its own merchandise. Their costs of adding products is extremely low, and the Supreme Court just handed them a “Get Business for Free” card. Rather than finding ways to stop progress in the name of collecting taxes, we should instead be focused on adapting to change. If states are so desperate to continue their out of control spending and plunder of peoples’ money, then they should adapt in the way they collect taxes – not further destroy their local businesses and hurt their own economies.
Danny Chabino
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