If you are an Internet entrepreneur or small business offering an affiliate program, New York’s Governor Eliot Spitzer wants to wrap you up in regulation and bureaucracy. Even if you run your business from Ohio or California or Hawaii.

If your business sells more than $10,000 to those in New York locations and you have an affiliate based in New York, you would be required to collect and remit taxes to New York authorities. For small businesses and entrepreneurs who sell through affiliate programs, this could be bad news.

Janet Attard of BusinessKnowHow.com writes that this plan, if it becomes law, would burden small businesses with extra expense and paperwork:

“I think the Governor’s proposal, should it be passed, will set a precedent that will unreasonably burden and harm New York small businesses and small businesses across the county.The burden comes in the form of extra costs to buy tax databases and to find and set up an online shopping cart to properly collect sales taxes. There’s also a huge time component (huge for the typical small business) associated with reporting and remitting the taxes.

New York’s tax system - and some in other states as well- is particularly cumbersome for small businesses because of the requirement to collect and remit taxes at the rate in effect in the taxing jurisdiction (usually the country or city) where you ship the product in the state. There are over 75 such taxing jurisdictions in effect in NY. Furthermore, there is no one tax rate that applies to all the taxing jurisdictions. * * *

If that all sounds like a huge nightmare, it is. Even though I’ve been able to get much of the process automated at this point, it still takes me or whoever I assign to the task at least half a day to fill out the quarterly tax report for New York. Imagine the time and effort that would be involved if all 50 states decided to put through proposals such as Governor Spitzer’s.”

And therein lies the point. What if all 50 states decided to do the same thing? Instead of leveling the playing field, it would further tip the scales in favor of big businesses that can afford to buy the databases and have in-house accounting departments to handle this.”

Oh, but wait,” you say. “Shouldn’t everyone pay sales tax?” Well, of course I am not suggesting that those obligated to pay sales or use taxes should refuse to pay.

The issue here is whether a seller that sells across state lines can be required to be the sales tax collection arm and remit it to each and every taxing authority. A U.S. Supreme Court case called Quill Corp. vs. North Dakota provides protection for interstate commerce, on the grounds that to require an out-of-state seller to comply with every tax jurisdiction in every state would be a crushing burden on interstate commerce.

According to the Tax Foundation, the Supreme Court said that a seller “must have a physical presence in a state in order to require collection of sales or use tax for purchases made by in-state customers. Physical presence means offices, branches, warehouses, employees, etc. The existence of customers alone” was not enough.

That case, applied routinely to mail order companies, encourages interstate commerce by stating that out-of-state sellers do not have the burden of complying with each and every taxing authority, unless they also have a significant presence in the state. Unfortunately, Governor Spitzer’s measure has been craftily cast in terms of Amazon.com versus in-state brick and mortar retailers. A recent New York Times blog post shows the lack of understanding of what this would mean for small online businesses. People are ganging up on Amazon, pointing out how easy it would be for Amazon to collect and remit taxes. The plight of smaller online businesses — especially microbusinesses — is getting lost in the shuffle.

The oh-so-informed Dawn Rivers Baker, Editor of the MicroEnterprise Journal, said to me in an email discussion, “I hope Governor Spitzer is open to feedback on this proposal from the state’s small business community. Everybody’s eyes are on Amazon with these proposals. In terms of fairness, nobody seems to consider it unfair for remote sellers to have to remit to a nationwide tally of over 7500 taxing jurisdictions, compared to only one for Main Street businesses!”

And if we think that somehow by adding sales tax collection it will stop people from buying online and drive them to buy from local retailers, think again. That’s contrary to human nature. Nothing is going to turn back the tide of online shopping. All shopping online is not about price — often it’s about getting a wider selection. Often it’s purely about convenience — of being able to shop from your home or office without having to run all over town. To assume that everything boils down to price and that requiring sales tax to be collected will somehow cause people to shop less online, is naïve — and years too late.

Posted in Money Management