Yesterday, Governor Chris Gregoire issued a press release urging Congress to pass the Marketplace Fairness Act, which would permit states to collect sales tax from out-of-state sellers.
It's an idea that makes sense, of course, and God knows the state could use the extra money. The Washington State Department of Revenue estimates that passage of the act could generate an additional $558 million in tax revenue for the 2013-2015 biennium, $934 million by 2015-2017. And it sure is hard to find a compelling argument for continuing to give out-of-state sellers a competitive advantage over local retailers.
But... as a former small business owner who once relied on out-of-state sales to pay my rent, prior proposals to close this tax "loophole" had always given me the willies.
In the 90s, my ex and I had a little software company, mostly selling a few titles we developed ourselves. By far the bulk of our sales went through the retail channel—about 70 percent moved through the major mail-order catalogs, which required us to buy expensive co-op advertising for the privilege of being stocked. We didn't always sell through our co-op, but when we did it could be months before we got paid. If ever.
But the direct sales, well that was almost pure margin, and the credit card transactions were promptly deposited into our checking account. And while these direct sales rarely amounted to more than a few thousand dollars a month, they consistently generated the cash flow we needed to make ends meet. We sold into all 50 states, though sometimes only a few units per state a year, but had we been forced to file quarterly returns in every state in which we did business, well, it simply would've been impossible. Imagine filing taxes 200 times a year. We didn't earn enough money to hire an accountant, and there weren't enough hours in the day to do the paperwork ourselves.
Whenever I tried to explain this to legislators, my concerns were shrugged off by Republicans and Democrats alike. I never felt that most elected officials understood the needs of a truly small business, if they even cared.
And so I was relieved to read that the proposed legislation exempts sellers who sold less than $500,000 in total out-of-state sales during the preceding year.
I'm not sure the bill is perfect. I would've preferred the federal government serve as a single collector to simplify filing, much in the same way that the state collects sales tax for local taxing districts. And that $500,000 exemption may in fact be too low a threshold. But from the looks of it, this is legislation that a small business like mine could've lived with.
So yeah, with online commerce representing an ever larger portion of our economy, it's past time to start requiring large out-of-state retailers to collect state sales tax.