Legislation approved by the Senate earlier this year to require online businesses to collect sales taxes from out-of-state customers could have a unfair impact on businesses owned by minorities, women, veterans and other groups, according to a new study.

The study, from the advocacy group Minority Media Telecommunications Council, focuses on the exemption in the legislation for businesses with less than $1 million in remote sales. The study was backed by the online auction site eBay, which has been a vocal opponent of the Marketplace Fairness Act.

The study was conducted by Jonathan Orszag, a former economic advisor to President Bill Clinton who now works as senior managing director of the economic consulting firm Compass Lexecon. In the paper, he assessed the bill’s rationale for its definition of a small business and analyzed the impact of the law on small businesses, including women, minority and veteran-owned businesses in America. In releasing the study Tuesday, the Minority Media Telecommunications Council noted that it has worked for decades to establish legally defensible definitions of small businesses to facilitate the development and prosperity of private enterprises owned by African Americans, Latinos, Asians, women and other underrepresented groups in the American business community.

It noted that recent actions by the Supreme Court in the area of affirmative action underscore the importance of carefully crafting small business definitions in federal and state law to enhance small business ownership across all segments of American society while remaining true to the Constitution, as the Supreme Court interprets it.

The Marketplace Fairness Act, as passed by the Senate in May, includes a safe-harbor provision for small businesses, using out-of-state revenues to establish whether a business would be exempt from the bill’s compliance costs (see Senate Passes Internet Sales Tax Legislation). The Republican leadership in the House has not yet advanced the legislation, citing anti-tax concerns, but last month the chairman of the House Judiciary Committee, Rep. Bob Goodlatte, R-Va., released a set of principles for taxation of Internet sales, including the elimination of the $1 million sales exemption (see House Republicans Release Principles for Online Sales Tax Legislation) “Governments should not stifle businesses by shifting onerous compliance requirements onto them; laws should be so simple and compliance so inexpensive and reliable as to render a small business exemption unnecessary,” said one of Goodlatte’s principles.

Orszag’s report concludes that the small business definition in the Marketplace Fairness Act “is not supported by any available empirical evidence” and could “impose so-called transaction costs (or compliance costs) on some businesses—many of which may be owned by women, African Americans, Hispanics, Asian Americans, Native Americans/Alaskans, Hawaiian/Pacific Islanders, and veterans—which is economically inefficient.”

Orszag’s paper recommended that any small business safe harbor in the MFA use the existing small business definitions in federal law and existing Small Business Administration regulations, concluding that such a definition would be “less likely to harm” small minority- and women-owned businesses.

Expanding Nexus
“The Marketplace Fairness Act seeks to define when businesses must collect sales taxes on transactions with residents who do not have so-called ‘nexus’ in the states in which the business itself has nexus,” Orszag said in a conference call with reporters Tuesday. “It exempts businesses with annual out-of-state sales of $1 million or less from collecting taxes where they do not have nexus. What I’m seeking to analyze is how the definition of small business in the Marketplace Fairness Act compares to the definition of small business used by other government agencies, whether there’s empirical evidence to support the definition of small businesses in the MFA, and what types of businesses might be affected by that.”

Orszag said he found there is no empirical evidence to support the notion that the appropriate definition of small business is less than $1 million in out-of-state sales, as the Marketplace Fairness Act currently does. “There is no publicly available data correlating small business, as defined in the MFA, with an out-of-state sales figure,” he added. “If you go to the definition of small business that the SBA uses, it varies by industry and the thresholds tend to be much higher. If you look at, for example, mail order retailers, they define a small business as one with less than $35.5 million in sales. If you go to, say, a group of doctors, it would be $10 million. The thresholds vary by the type of industry, and they’re either using an annual sales figure or the number of employees. Using a definition that’s not lacking empirical support, it’s very likely that there are many small businesses under the existing SBA rules that would be considered ‘large businesses’ under the Marketplace Fairness Act. From an economic perspective, that risks imposing so-called transaction costs, or compliance costs, on those businesses. If these businesses are actually quite small, then you’re asking them to put in place costs to the business that they otherwise don’t have today.”

Orszag would like to see a greater sense of “equity” in any online sales tax legislation. “If Congress and the president want to establish a safe harbor, which does make sense, it would make much more sense to look to the SBA guidelines,” he said. “If you’re a small business under the SBA guidelines, you’re a small business under the Marketplace Fairness Act. If you’re not, you’re not. That would make much more sense. This would ensure that there is not a disparate impact on businesses depending upon their size.”

Orszag noted that small businesses tend to be disproportionately female owned and owned by minorities. “There are 27.8 million small businesses in America,” he pointed out. “Roughly 7.8 million of these are owned by females, 4.6 million are equally owned by males and females. You have another 1.9 million owned by African Americans, 1.6 million by Asian Americans, 2.3 million by Hispanics, and then some more owned by Native Americans and Hawaiian and Pacific Islanders. There are also 3.7 million small businesses owned by veterans. So this is an important issue, one where it’s important to get these definitions right. The government shouldn’t have inconsistent definitions across the various rules and laws that they put in place.”

The Minority Media Telecommunications Council emphasized that it does not take a position on the merits of the MFA generally. The MMTC said it is concerned, however, that a judicially untested and economically unsupported definition of small business risks harming minority-owned small businesses and could undermine efforts to maintain effective federal and state statutes and regulations in the courts. The MMTC is therefore calling upon Congress to reconsider the definition of small business in the MFA’s safe harbor provision so that any final version of the bill would apply existing federal laws and Small Business Administration regulations to define small businesses.

Engine for Growth
“We at the MMTC are particularly interested in this issue,” said Dr. Nicol Turner-Lee, vice president and chief research and policy officer at the MMTC. “We worked for decades to establish legally defensible definitions of small businesses, and to facilitate the development and prosperity of private enterprises, particularly African Americans, Latinos, Asians, women and other under-represented groups in the American business community. We are concerned about how the MFA could impact small minority-owned businesses. Minorities are an engine for growth in the small business community. Clearly online platforms are creating the lowest barrier to entry for minority entrepreneurs. With high mobile broadband penetration rates among people of color—and an environment where the race, gender and ethnicity of the business owner are less prominent when compared to the brick-and-mortar world—clearly the digital economy is the next stage in economic development and growth for these businesses. Considering that, we want to ensure that they are part of this burgeoning environment while at the same time making sure that they are not locked out by this figure of compliance that would essentially put them out of the marketplace.”

Turner-Lee noted that the Obama administration and other supporters of the Marketplace Fairness Act cite the small business safe harbor as the reason why they support the bill. “But new evidence suggests that the safe harbor has a major flaw,” she added. “It could result in disproportionate harm at small businesses owned by minorities and women. To be clear, we at the MMTC are not taking a position on whether or not sales taxes should be collected online. We’re primarily focused on the small business safe harbor in the MFA and how it could lead to the unintended consequence of disproportionately harming small minority-owned businesses. The possibility for people of color, particularly minority entrepreneurs who do not meet that compliance threshold, to compete across state lines and develop their businesses is a huge opportunity and something that potentially could be missed if we’re not navigating that definition clearly enough and in compliance with other definitions.”

She said her group agrees with Orszag’s paper, that a better approach would be to establish the small business safe harbor using the existing definitions in Small Business Administration regulations. “We don’t have to recreate the wheel here,” Turner-Lee added. “We’ve got something to stand on to move forward, and something that will not create unintended consequences or harm to minority entrepreneurs.”

She also noted that the Supreme Court recently issued a decision on affirmative action, in the Fisher v. University of Texas at Austin case, which could be pertinent. “We are keenly aware of the scrutiny that courts are giving to statutory definitions in this area,” Turner-Lee said. “We don’t think that this is a good time to introduce a new economically unsupported and judicially untested small business definition.”

Turner-Lee believes there is great opportunity now for people of color to become highly engaged in the digital economy, but a threshold of $1 million is not going to reach the small business owner who is just starting a business online. “It will not reach that aspiring entrepreneur of color that is trying to experiment with new ways and business models to support their family, and clearly will not help that veteran-supported business that is getting on their feet,” she added.

Turner-Lee acknowledged that eBay approached the MMTC and commissioned the study. “Our interest was related to the fact that most eBay [merchants] don’t meet that threshold and would not be in compliance with this particular rule,” she said. “The Internet has provided a very low barrier to entry for minority entrepreneurs. It was really important for us to understand the eBay model and figure out how we apply that business model to entrepreneurs that are trying to gain entry into this marketplace.”

Shopping Center-Sponsored Poll
In contrast, a poll released Tuesday by a group representing shopping center owners found overwhelming support for the collection of online sales taxes at the time of purchase.

The International Council of Shopping Centers released the results of a national poll showing that a majority of Americans feel it would be far easier to pay sales or use tax on online purchases at the time of purchase. The poll also showed an increase in support among voters for federal legislation that would restore basic free market principles for brick-and-mortar retailers.

“Americans increasingly recognize that this is not a new tax,” said ICSC president and CEO Michael Kercheval in a statement. “The results of this poll demonstrate that consumers want a sales tax system that supports their retail habits and gives brick-and-mortar merchants a chance to compete on a level playing field.”

The poll found that 78 percent of voters said it would be easier to pay state sales or use tax on online purchases at the time of purchase rather than through special forms or when they file their income taxes. That figure was up three percentage points since a similar poll in October 2012.

In addition, 64 percent of consumers said they are aware that they are required to pay state sales or use tax on online purchases, if not collected by the online seller, when they file their state income tax. That figure was up 23 percentage points since October 2012.

The poll also found that 64 percent of Americans said they support federal legislation that would require online-only sellers to collect sales tax at the time of sale, up five percentage points since October 2012.