Many small and midsize online retailers are worried about the impact on their profitability if federal legislation is approved that would require them to collect sales taxes from customers, according to a new survey.

The survey, by the accounting firm McGladrey, polled online retailers about the impact of the Marketplace Fairness Act, which would exempt Internet retailers with less than $1 million in remote sales from having to collect taxes. The Senate passed the bill in May, but the House has not yet acted on the legislation (see Senate Passes Internet Sales Tax Legislation).

McGladrey polled online retailers with annual revenues between $10 million and $1 billion, and found that only 38 percent of them projected that the MFA would have a negative impact on their profitability. However, the picture changed significantly when comparing projections in the higher versus lower revenue ranges. While 50 percent of executives at companies with annual revenues between $10 million and $50 million projected negative impacts on profit, the number dropped to 22 percent for executives at companies in the $150 million to $1 billion range.

McGladrey concluded from the survey that if the MFA becomes law, smaller retailers are more fearful of a negative impact on profitability, while larger retailers indicated they were not as troubled. Even worse, 43 percent of the executives polled said the MFA’s passage would drive them to consider terminating at least some online sales. 

“These results make clear that the potential impacts of this legislation are wide-ranging and highly complex,” said McGladrey partner Dustin Petersen in a statement. “While small and midsized companies are understandably concerned about losing a competitive advantage and incurring higher compliance costs, those on the higher end of the revenue range appear to see this as somewhat of an equalizer, as they feel that they have been disadvantaged by charging state sales tax and burdened by the disorganized array of systems through which they have had to do so.”  

The size-based concerns are also reflected in respondents’ awareness of the MFA. There is widespread awareness of the legislation among decision-makers in the small and midsize segments. Overall, 96 percent of those surveyed reported being familiar with the MFA. However, 70 percent of the survey respondents who reported being part of internal discussions about the legislation at their companies were in the lower revenue range, indicating a clear sense of urgency at firms of that size.

While the survey suggests that less than 40 percent of small and midsize online retailers expect to be hurt significantly by the law, it nonetheless indicates that passage of the MFA could have substantial impacts on both the market and the consumer experience, with shuttered online sales operations, higher retail prices and greater competition among a wide range of predictions. Forty-three percent of all respondents said they were either somewhat or very likely to consider terminating some online sales in response to the MFA, and nearly all (98 percent) said they would pass along increased compliance costs to the consumer.

Most large online retailers currently have processes in place to address remote sales taxes, McGladrey pointed out, but many smaller companies do not. To comply with the MFA, these smaller remote sellers would need to adopt new technologies and processes to automate their transactions. The survey indicates that most of these companies will pass the cost of these investments onto their customers, while others are predicting that they will opt to terminate their online sales altogether to protect their traditional sales revenues.

“While the MFA’s prospects have dimmed substantially since its passed the Senate earlier this year, the momentum it had at the time and the continuing interest of media, major players in the business community and state governments is sure to keep it among the top tax issues in Washington for the remainder of this year and beyond,” said Peterson. “As the debate continues, it is critically important that we understand as much as possible about how different types of firms might be impacted by a veritable sea-change in their tax obligations, as well as how they might ultimately respond to those changes.”

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