The Small Business Case for an Internet Sales Tax

eCommerce is finally a staple of the US economy. Comscore reported a record holiday season with total spending exceeding $29 billion dollars across a two month period. eCommerce continued to grow, despite the worst economic downturn since the Great Depression. This included a record day of nearly one billion dollars! For many people, the main advantage is convenience, variety and of course price comparisons. But there is also a huge hidden advantage in the United States: no sales tax.

For years, Internet commerce has had a hugely advantageous tax loophole, wherein the majority of purchases are not subject to sales tax. But that will likely change given the fiscal crisis that is looming for many state governments. What has been stopping this change to date has been that everyone hates the idea of taxing businesses on the Internet: Consumers hate it because they will need to pay state taxes; Small businesses hate it because they will become less competitive online and will have a logistics nightmare trying to tax across numerous states; Internet businesses hate it because they lose a huge competitive advantage against brick-and-mortar stores. And of course, all this will ultimately lead to lower sales (and taxes) so even the municipalities fare poorly.

But that is what economists call "short range thinking." As Stanford's Thomas Sowell eloquently expressed, people often think through problems one layer deep but we need to move beyond stage one to truly understand the economic impact of a fiscal decision. It is true that in the short run, taxing small businesses has serious disadvantages. The long term effects of an Internet sales tax, however, are beneficial to almost everyone:

Small Businesses: Many small businesses will likely stop selling across state lines. The cost of doing business with a convoluted state tax system is far more costly than the benefits. This disadvantage will certainly hurt many small businesses who sell out of state...in the short run.

But I believe that small businesses have the most to gain by having this tax. A main advantage for small businesses is that they are a part of the community. This enables trust, a higher service level, and loyalty. In fact, most small businesses, even those that offer ecommerce, principally sell to their local market — most often offline. Plus, most consumers want to see an item before they purchase it (that's why so many online stores offer free return shipping). Today, many consumers actually look at a product locally and then buy online to find a cheaper price — and to avoid sales tax. But once the tax loophole is closed, small businesses can grow their local customer base, where they have a true competitive advantage (price is never a competitive advantage).

eCommerce Businesses. Internet companies will need to start charging taxes, just like their counterparts offline. This will certainly impact the price advantage online stores have held and that may impact sales in the short run. But they will also face less competition as a result. Many small businesses that had been competing online will cease to do so. This will give eCommerce providers more dominance in the marketplace, particularly for products that are most conducive to online sales (such as Jeff Bezos' top 20 list).

State Governments. Local governments will see increases in taxes, both from eCommerce (particularly from those pesky online stores that locate in 0% tax havens) but also because small business revenues will grow as people focus more on service and less on price. This tax is a huge boon to states that desperately need funding.

As a consumer, you may not want to pay an additional tax. But this is not really a tax increase; it's just closing a tax loophole. And while as a consumer you may rebel against the idea of an internet sales tax, remember that we all wear multiple hats: perhaps you'll pay a little more as a shopper, but that slight cost will be outweighed by the benefits to your business or the services offered by your state government.

Considering there are almost thirty million small businesses in the United States, and most of those are sole proprietorships, the benefits to the small businesses should outweigh the costs. And our local governments are suffering massively. Services are being cut and taxes have to be raised. But before we raise taxes, let's start by eliminating loopholes such as this one.

 Source:http://blogs.hbr.org/