Tags: internet | tax | business

Flawed Govt Study Minimizes Internet Tax Effects

Friday, 06 Dec 2013 03:14 PM

By John Berlau

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Under presidents of both parties, the Small Business Administration’s Office of Advocacy has produced quality independent studies on the harmful tax and regulatory burden on smaller firms.

So it is especially troubling that this office would now produce a study minimizing the harm and purporting to show benefits of new Internet sales taxes on small businesses.

The trouble is it paid $80,000 to two longtime advocates for letting states levy sales taxes on remote online sellers to do so. ("Hat tip," or credit, to Andrew Moylan of R Street for finding the contract.)

Donald Bruce and William F. Fox of the University of Tennessee’s Center for Business and Economic Research have for over a decade produced studies that estimated revenue losses at the very high end for online sales “escaping” taxation and minimized overall economic effects of allowing states to tax out-of-state sales.

In the new SBA “study,” they complain about how states’ lack of remote taxing power works “at the expense of many small ‘Main Street’ vendors.”

The authors then make the bizarre and unsubstantiated claim that only 1,817 online retailers will be affected by the taxes states are authorized to levy under the Marketplace Fairness Act (MFA), a bill that passed the Senate this year and is pending in the House. The bill has a “small seller exemption” for firms with less than $1 million in total sales.

The study’s finding comes mostly from a survey of the top 1,000 companies in a survey by Internet Retailer magazine, plus some other questionable assumptions. But many retailers who sell online do not participate in that survey. And the SBA itself has specific definitions of small firms that well exceed $1 million in sales. As Matt Winn notes in VentureBeat, the SBA defines an electronics firm as a “small business” if it has less than $30 million in annual receipts.

The divide between online and brick-and-mortar retailers is fading. Some small retailers have a physical location in one or two states, yet may sell their products online all over the nation.

These “Main Street” retailers suddenly would be subject to hundreds of state and local tax jurisdictions in places in which they have no representation. And there is no income threshold for the audits and demand letters these jurisdictions could shove down entrepreneurs’ throats.

I have written previously on the MFA’s potential to usher in a back-door financial transaction tax that could allow states to take big bites out of middle-class savings vehicles such as 401(k)s.

Competitive Enterprise Institute Adjunct Analyst Jessica Melugin has written comprehensive papers on how the MFA threatens privacy, due process, and healthy tax competition among the states.

Not content blowing $80,000 in our tax dollars on a flawed and one-sided study, SBA is also using more tax dollars and staff time to gin up a Twitter campaign for small business support of the MFA. Small entrepreneurs should indeed tweet, but the hashtag they should use is #SBAnofriend.

John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute. He is the author of the book “Eco-Freaks.” Read more reports from John Berlau — Click Here Now.

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