Online Sales Tax Won't Sink Small Businesses

By Pedro Hernandez | Posted May 15, 2014

In several states, online sales tax is already being collected by big etailers like Amazon. The Internet, for better or worse, is losing its status as a tax-free zone.

That comes as no surprise to Jonathan Barsade, CEO of Exactor, a provider of sales tax automation services for businesses. States and local jurisdictions have been missing out on revenues generated by taxes that would have otherwise been collected by brick-and-mortar stores as consumers flocked to the Internet in search of the best prices.

The consensus, according to Barsade, is that even the Internet can't dodge the tax man forever. Prevailing wisdom says that lean-running, resource-strapped small businesses will experience a big dip in sales if they collect taxes for Internet purchases. Adding insult to injury, they will be burdened with the administrative overhead of dealing with potentially thousands of tax jurisdictions.

After all, if Amazon is already getting pinched, what chance does a mom-and-pop shop have?

Impact of the Amazon Tax

A recent study from the Charles A. Dice Center for Research in Financial Economics at Ohio State's Fisher College of Business has raised eyebrows among market watchers. It revealed that households in states affected by the "Amazon tax" reduced their spending at the ecommerce giant by 9.5 percent.

"There's no doubt that if you take away taxes, the merchants pass those savings on [to the customer]," admitted Barsade to Small Business Computing. Yet, all the current hand-wringing ignores an important fact: Internet taxes are becoming the new normal.

Time is a big equalizer, according to Barsade. "The study was done very soon after Amazon started collecting in those states," said Barsade. Over time, price elasticity and competitive pressures will combine to establish new baselines. "Those things take some time," said Barsade. "All in all, the Internet is a different way of making the same purchase."

Focusing on the apparent damage that online taxes inflicted on Amazon doesn't tell the whole story. The takeaway, said Barsade, "wasn't necessarily that online sales went down, but that much of them shifted to other online stores." According to the study, competing online retailers saw a 19.8 percent increase in purchases.

Amazon's pain is also local retailers' gain. Sales jumped by 2 percent at brick-and-mortar retailers in the affected regions.

Even if Internet taxes won't put small online retailers out of business, concerns remain that they'll be buried under a mountain of extra work.

Tech Takes on the Tax Man

Barsade lamented that small businesses—stuck on old technologies and concepts—"still do back-of-the-envelope calculations for taxes."

New cloud-based automated sales tax platforms, such as Avalara and Barsade's own Exactor, lift that burden by integrating with a small business' systems (both etailers and brick-and-mortar shops), automatically and accurately calculating and processing sales tax. Even if a seller is not subject to complex, multi-state tax collection, cloud sales-tax services have their uses.

Some of Exactor's customers never ship a single product across state lines. "We have many clients that may use [Exactor] for one or two jurisdictions," said Barsade. Why bother? "For the simplification of their compliance efforts," he added.

Entrepreneurs don't go into business "to fill out tax returns every month," argued Barsade. They want to serve their customers, provide great experiences, and of course, profit from the experience.

Automated sales tax collection and processing can free up a small business owner's time and ensures that tax obligations are handled accurately and timely manner. Best of all, there's no need to worry about incurring fees and penalties that can break the bank and put a company's finances at risk.

"A service like this allows the business to focus on the business," said Barsade.

Pedro Hernandez is a contributing editor at Small Business Computing. Follow him on Twitter @ecoINSITE.

Do you have a comment or question about this article or other small business topics in general? Speak out in the SmallBusinessComputing.com Forums. Join the discussion today!

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