Internet Sales Tax Will Bite SMBs

The U.S. Senate is debating the implementation of an Internet sales tax. This measure would require retailers to begin collecting local taxes on their online sales. The tax would apply to any online retailer with more than $1 million in annual revenue, and the taxes would be sent to the states where the products are delivered.

More taxes are the last thing small business owners need as they try to grow their companies. Despite the beliefs of politicians, many of whom have never run a company, many small companies operate on thin margins -- and taxation, even at low rates, could threaten their profitability. Further, the enactment of this law would put new paperwork burdens on small business owners, some of whom do their own books and who might have to hire additional staff to handle the administration of the tax distribution.

Let's be realistic, sending money to many different states that have varying local tax rates will be complicated. While this may not threaten a giant online retailer such as Amazon.com, smaller companies are likely to be overwhelmed by trying to track sales and forward tax payments to hundreds of local governments.

Further, the $1 million figure is well below the widely accepted definition of a small business. Internet sales taxes have been proposed in the past at varying thresholds. The reality is: the smaller the business, the less likely it will be able to seamlessly implement the tax requirements.

Alaska, Delaware, Montana, New Hampshire and Oregon are the only states that do not have a state sales tax. However, if the proposed legislation passes, a Montana-based sporting goods shop that sells fishing gear online to a customer in New Jersey would have to forward 7% to the Garden State to cover the sales tax. Talk about taxation without representation!  Not surprisingly, senators from the five states that do not have sales taxes are lobbying to stop the proposed law.

Small business growth spurs job creation. If we want them to expand both locally and across the country, government should make it easier -- not harder -- for them to do so. I understand the question of fairness. Businesses located in states that have a sales tax often lose out on business to neighboring states that do not have them. However, I believe small businesses need fewer taxes and fewer fees in order to grow. Entrepreneurs tell me this every week.

Policy makers are looking for new sources of revenue to sustain spending programs, and small business owners look like a lucrative target. Internet sales have skyrocketed in the past two decades and quickly became the norm for millions of consumers. Last year, Internet sales in the economy totaled an estimated $226 billion, according to the Department of Commerce.

Local governments want to get a slice of that pie, but the smarter move would be leaving it in the hands of small business owners.

Rohit Arora is co-founder and CEO of Biz2Credit, an online credit marketplace that connects small- and medium-sized businesses with a network of 1,100+ lenders, service providers, and complementary business tools.  Having arranged $800 million in funding, Biz2Credit is a leading resource for loans, lines of credit, working capital and more.  Follow Rohit on Twitter @Biz2Credit and on Facebook. http://www.facebook.com/businessloan.