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eBay prepares for new fight over Internet sales taxes

Draft U.S. Senate bill targeting even very small eBay sellers, who might make only a few thousand dollars a year in profits, has the auction site crying foul.

eBay is preparing to battle an Internet sales tax proposal targeting small businesses that do even $1 of online sales a year.

The San Jose, Calif.-based auction site is alarmed by forthcoming legislation, reported yesterday by CNET, that would allow states to require taxes to be collected from even very small out-of-state Internet retailers--some of eBay's best customers, in other words.

While similar tax proposals have circulated for years, earlier versions exempted small sellers with less than $5 million in revenue. Then the exemption dropped to $1 million. Now the proposed cutoff in a draft bill from Republican Sens. Mike Enzi of Wyoming and Lamar Alexander of Tennessee has fallen to only $500,000 in annual revenue, and some Internet tax proponents would like to eliminate it completely.

eBay's Brian Bieron says an exemption for small sellers in a draft Senate bill "is remarkably low."
eBay's Brian Bieron says exemption for small sellers in draft Senate bill "is remarkably low." eBay

"We would hope that any senator supporting a change in Internet sales tax laws would recognize the importance of truly protecting small business retailers from new tax burdens on the Internet," Brian Bieron, eBay's senior director for federal government relations and global public policy, told CNET yesterday.

What worries eBay is that the $500,000 exemption doesn't mean Internet sales. If a golf store with $500,000 in revenue from a physical storefront started selling even a small number of golf clubs on eBay, the owner would have to begin collecting taxes for dozens of states and be subject to audits from each one as well.

That's not something small businesses can reasonably deal with, Bieron says. "The proposed small-seller exemption is remarkably low based on both the historical precedents of earlier efforts to craft the small-business exemption, and it's also well below any reasonable definition of a small business, whether in retail or even in other kinds of businesses," he says.

The Retail Industry Leaders Association, which represents big box retailers, says that new federal legislation is necessary because,, Blue Nile, and other online retailers that aren't currently required to collect taxes are unreasonably depriving states of revenue and enjoy an unfair competitive advantage.

On the other hand, a 1992 Supreme Court ruling says that, in general, retailers currently can't be forced to collect sales tax on out-of-state shipments unless they have offices in those states. And with more than 7,500 taxing jurisdictions, each with its own rules and ability to conduct audits, complying with each is is not a trivial task.

Many of the sellers that would be affected by the Enzi-Alexander proposal would be mom-and-pop shops. If an eBay seller has $500,000 in revenue and a profit margin of perhaps 8.3 percent, he or she will make only $41,500 a year--but would still be required to collect taxes on Internet sales.

CNET obtained a draft Senate bill prepared by Mike Enzi of Wyoming and Lamar Alexander, which targets Internet sellers with over $500,000 in annual revenue. Click for larger version.
CNET obtained a draft Senate bill prepared by Mike Enzi of Wyoming and Lamar Alexander, which targets Internet sellers with over $500,000 in annual revenue. Click to enlarge. U.S. Senate

Even if the profit margin is twice as high, "that's a $100,000 company," says Jerry Cerasale, senior vice president of government affairs for the Direct Marketing Association. "And they have to collect in 46 states and know all that stuff? And be subject to 46 state audits?"

The U.S. Small Business Administration has far more generous definitions of small businesses. An SBA table defining retail categories says that "hobby, toy, and game stores," for instance, qualify as small businesses if they have up to $25.5 million in annual sales. A U.S. Treasury Department report (PDF) from August suggests the cutoff should be $10 million in annual revenue.

Some states have proposed whittling down the exemption for small sellers to $100,000 and then eliminating it altogether. One proposal from Kansas, Kentucky, and Washington state (PDF), which does not appear in the draft Enzi-Alexander bill, says: "The exemption threshold shall be set at a relatively low level and over time adjusted downward so that only sellers making isolated or occasional sales are excluded from the collection requirement."

Technically, of course, Americans in states with sales taxes are supposed to keep track of out-of-state purchases and cough up the necessary sales tax on April 15--the concept is known as a "use tax". But state tax collectors have long complained that in practice, that just doesn't happen, and that the money has remained in taxpayers' pocketbooks.

eBay has found an ally in two other senators, Ron Wyden (D-Ore.) and Kelly Ayotte (R-N.H.), who, as CNET reported yesterday, introduced a resolution that amounted to a preemptive strike against Enzi-Alexander. The non-binding resolution says no new law should "impose any new burdensome or unfair tax collecting requirements on small Internet businesses and entrepreneurs, which would ultimately hurt the economy of, and consumers in, the United States."

Jason Brewer, a vice president at the Retail Industry Leaders Association in Arlington, Va., which represents big box retailers, says that eBay and other Internet retailers are exaggerating how difficult it would be to collect sales taxes.

"They have the technology to do it," Brewer says. "It's not hard. It's simply a matter of updating our laws." (A number of companies sell software that will calculate tax rates and file sales taxes.)

In a statement on its Web site, eBay says: "eBay Inc. opposes raising taxes on the Internet or its users, as well as any attempt to impose Internet sales tax collection burdens on the small businesses who can least afford it. This is certainly not the time to impose a major new tax burden on Internet vendors working to implement successful new business models."