EBay Fears Internet Sales Taxes Might Kill Small Businesses Online

EBay has a message for federal officials mulling an Internet sales tax: Just say no.

The world's largest Internet auctioneer says requiring e-commerce firms to collect sales tax could stifle the growth of small businesses online.

But eBay (NasdaqNM:EBAY - News) may be fighting a losing battle. States are lobbying Congress to require retailers to collect taxes on sales to all customers -- regardless of where they live.

Under current law, retailers have to collect taxes from shoppers only in states where they have a store or warehouse. (See related stories, A1, this page.)

Analysts expect Congress to pass an Internet sales tax law by 2008. That could bring an extra $15.5 billion in tax revenues a year to state coffers, they say.

The question is: What impact will that have on small Internet firms, including those that sell via eBay?

Over the last 10 years, eBay has become a haven for small businesses looking to hawk everything from Beanie Baby collectibles to computers to cars -- typically without charging sales tax.

The company ended the first quarter with 60.5 million active users, up 34% from a year ago.

Many eBay sellers are mom-and-pop operations, ill-equipped for handling tax collection, says Hani Durzy, an eBay spokesman.

"We think this is an undue burden on small businesses," he said. "We are opposed to raising taxes as a way for cash-strapped states to get more revenues out of the smallest businesses."

EBay contends that most small businesses lack the cash and manpower to handle the complexities of collecting and distributing sales taxes.

States say they plan to make the process less painful. Over the last few years a group called the Streamlined Sales Tax Program has been working on simplifying the tax-collection system.

But eBay isn't thrilled with their efforts.

There are 7,600 different state, county and city tax jurisdictions in the country. And the Streamlined Sales Tax Program allows for a different rate for 49,000 jurisdictions based on ZIP Code, Durzy says.

"The burden would be placed on small businesses on eBay to manage and maintain some sort of program to collect from as a many 49,000 jurisdictions," he said. "Our feeling is that it is not simple, and it will not be simple to comply."

With an eye toward simplification, the Streamlined Sales Tax Program is reviewing several forms of tax-collection software.

The software would automatically calculate the amount of tax owed. Retailers would then send the amount electronically to the software company, which would forward the payments to the state.

Using the software means that retailers won't have to get their hands dirty, says Charles Collins, vice president of government affairs for Taxware, which makes tax-collection software. "We will be a third-party agent working for the state," he said.

The Streamlined Sales Tax Program has already agreed to pay the cost of the software for all retailers.

With that cost off the table, small businesses shouldn't have difficultly collecting the tax, says Collins.

"I have a problem seeing how this is going to be much of a burden for small businesses," he said.

Some e-commerce firms agree.

Amazon.com (NasdaqNM:AMZN - News), the world's largest online retailer, doesn't expect merchants to have trouble with the tax.

"Amazon believes that if the system is truly simple (and can) eliminate the costs and burdens of collecting sales taxes, then sellers of all sizes should be able to comply," said Rich Prem, director of global indirect taxes for Amazon, in an e-mail.

But eBay doesn't buy the argument. Tax-collection software can't operate on its own, says Durzy.

"Someone is still going to have to manage the collections," he said. "We think that this would put small sellers in general at a disadvantage vs. major corporate retailers."

Avalara, a software company, has been selling tax-collection software for the past year. It thinks the process is already simple enough for small businesses to handle.

Many of Avalara's customers are businesses with five to 100 workers. Some handle up to 2.5 million transactions a year.

Automation is of primary concern to small businesses, says Rory Rawlings, founder of Avalara. "We had to make it simple or we wouldn't have any customers," he said.

EBay has been lobbying states to exclude some small businesses from collecting sales tax.

Sources say eBay is looking to get an exemption for companies with sales of less than $5 million.

Durzy, though, says the rumors are false. "We're not giving a specific number of where we would like it to be," he said. "We think $5 million is not right. We would like to see it higher."

Again, Amazon disagrees with eBay.

Prem calls even a $5 million cutoff "unreasonably high."

Amazon would prefer to see online retailers with annual taxable sales of $10,000 be exempt from collecting the tax.

Prem contends that fewer than 300 retailers have annual sales of more than $5 million.

What's more, about 50% of online retail sales come from sellers with less than $5 million in annual sales, Prem adds. "That means that states will be foregoing half of the revenues otherwise expected to be gained," he said.