Rescuing Internet Entrepreneurs From Tax-Hungry States

Small businesses are the engine room of the U.S. economy, responsible for most of the job growth in this country for years now. The Internet has helped small businesses hum along, and small businesses are coming to the rescue in helping to create jobs for the 15 million people now chronically out of work, as the U.S. unemployment rate stays stubbornly higher than 9%.

But since states blew a gaping estimated $125 billion to $140 billion hole in their finances with reckless spending and lax oversight, the small business Internet guy or gal on Main Street is now in their focus.

Increasingly, states are slapping new taxes on small online businesses, including demands to collect and remit sales taxes for out-of-state online purchases.

So instead of cutting the waste in their budgets, states have lazily mimicked the federal government in hiking taxes on the entrepreneurs who can create jobs.

A growing “number of predatory tax proposals in states” is the impetus behind federal legislation introduced by U.S. Representatives Dan Lungren (R-CA) and Zoe Lofgren (D-CA), says the 362,000-member National Taxpayers Union (NTU). Pete Sepp, executive vice president of NTU, in a statement.

The two Congressmen have introduced the "Supporting the Preservation of Internet Entrepreneurs and Small Businesses" resolution (H.Res. 95), a bipartisan bill that opposes any Congressional legislation granting state governments authority to impose new burdensome or unfair tax collecting requirements on small online businesses and entrepreneurs.

State tax increases that often come after pressure from government sector unions, who use their taxpayer paid for dues to lobby for tax and spending hikes that cost taxpayers a lot of money, hikes that they hector for to cover their benefit demands.

The public sector unions want you to think that their fights with governors who aim to pare back their cushy benefits the private sector doesn’t get—and that you pay for--is an Erin Brockovich moment. But it is not.

It is not the altruistic public sector union against an evil company. It’s the public sector unions against taxpayers, taxpayers who pay for their cushy benefits via higher property, income and sales taxes. And now many states want their Internet companies to help foot their bills, too.

Sepp says: “In all too many states, 2011’s budget season has meant open season on the online retail marketplace. From renewed lobbying efforts to get federal buy-in for a nationwide sales tax cartel, to legislation and lawsuits they hope will give them the ability to tax beyond their borders, revenue-hungry state officials seem willing to try any political ploy or exotic legal theory that could fill their coffers. Practically every day, a new proposal is hatched in some state capital that would hit online businesses with new taxes in order to feed the reckless spending habits of lawmakers.”

Tod Cohen, eBay’s vice president of global government relations and deputy general counsel, says eBay supports the bill. Cohen said in a statement: "This resolution sends a clear signal that Congress will protect Internet-enabled small businesses from new, unfair tax-collection schemes." has also been challenging these state tax laws too.

The Computer & Communications Industry Association (CCIA) says it too backs the bill from Rep. Lungren and lead Democratic co-sponsor Rep. Lofgren (D-CA). The Lungren/Lofgren resolution would let Congress block states from imposing on their own “new burdensome or unfair tax collecting requirements on small online businesses,” says Sepp.

Sepp also says states may be crossing constitutional boundaries with their tax moves. “Before states go any further down the road to ruinous taxes – in the process kicking a can-ful of constitutional issues further toward Washington – federal lawmakers should do them a favor by saying ‘enough.’ That’s because state tax hikes targeted toward this sector could, ironically, lead to lower revenues,” he says.

Already, Internet entrepreneurs, and their clientele, pay all sorts of taxes, “on profits, payrolls, the property where they’re sited, and even for the highways that their shippers use,” Sepp adds. “Imposing huge new record keeping requirements along with heavier tax burdens could lead to job losses as well as reductions in the very business activity that could contribute to state treasuries.” Moreover, small Internet firms face having to comply with a maze of tax regulations, as high as 15,000 jurisdictions, depending on where they are sited, Sepp says.

CCIA agrees. On-line vendors typically have to sort “through the policies of thousands of taxing authorities around the country,” and also serve “as revenue collection agencies for each of them,” it says in a statement, adding: “It is counterproductive to add to the administrative burdens of small businesses at the very moment we need them growing and leading our economic recovery.

As the mid-term election results showed, “the American people remain fed up with tired tax hike proposals that harm the economy and fail to address the wasteful spending at the root of so many budget deficits,” says Sepp. “