There are fierce debates over how the South Dakota v. Wayfair decision will affect small online sellers or small brick-and-mortar businesses, but those debates hinge on how states now choose to enforce the collection of sales tax from out-of-state online sellers.
Michigan’s Treasury Department initiative to enforce collection of a 6 percent sales tax from out-of-state online sellers that make at least $100,000 a year or conduct at least 200 transactions in a year aims to “level the playing field” between Michigan’s brick-and-mortar businesses and out-of-state online sellers, according to the press release.
“Prior to this you could have gone online to some large retailer instead of a mom-and-pop shop and paid some sales tax at that time on that purchase,” Rachel Richards, tax policy analyst for the left-leaning Michigan League for Public Policy, told InsideSources in an interview. “So there’s that argument … that this is leveling the playing field for Main Street businesses.”
But the initiative, announced Tuesday, targets smaller online sellers with its low threshold and does little to help small brick-and-mortar businesses, whose decline many experts, like the Institute for Local Self-Reliance (ILSR), attribute to the rise of e-commerce, specifically e-commerce giants like Amazon.
The ILSR’s study found that Amazon is “upending the longstanding relationship between commerce and place, changing the way that our communities feel and threatening the revenue streams and social capital that they depend on to function,” which spells the demise of local mom-and-pop shops.
The only online sellers exempt from the Michigan sales tax are businesses with no employees (i.e., entirely run by the owner). According to QuickBooks, an accounting software program aimed at helping small- to medium-sized businesses, only zero-employee businesses make less than or equal to $100,000 per year.
Small businesses with one to four employees make around $387,000 per year, and those with more employees make upwards of $1 million a year. While 80 percent of small businesses in the U.S. have no employees, the Michigan initiative doesn’t provide much of an incentive for these small businesses to grow with its $100,000 in sales per year and 200 transactions per year threshold for the tax.
The tax does level the playing field in that it requires all out-of-state online sellers to pay the same retail sales tax that in-state sellers with a physical presence do. But large online sellers or large brick-and-mortar retailers with growing online presences — like Amazon, Target and Walmart — who have been nabbing market share from small stores with no online presence, already pay sales tax because they have met the physical presence requirements via warehouses or brick-and-mortar stores.
According to TechCrunch, Amazon claims 49 percent of the e-commerce market share, with all other competitors — the top ones including eBay, Apple, and Walmart respectively — claiming less than 10 percent, each.
Thus, according to the data, Amazon already provides most of the online sales revenue to states.
Michigan’s initiative goes after the businesses that don’t earn nearly as much. According to the Treasury Department’s press release, the state expects the added revenue from the online sales tax of out-of-state online sellers to add about $200 million to the state budget annually. For perspective, the 2018 state budget is $10.1 billion, which means the online sales tax revenue from small- to medium-sized online businesses will only be 2 percent of the state budget.
Alan Viard, a senior scholar who specializes in federal tax and budget policy for the American Enterprise Institute (AEI), told InsideSources that Michigan’s initiative is “pretty much in line” with other states pursuing the online sales tax, with the exception of its $100,000 per year threshold.
Viard said the height of the threshold for each state largely depends on the size of its economy. (Many other states are opting for a $500,000 threshold.) For Michigan, however, the $100,000 threshold is “surprising” because it won’t have that much of an effect on state revenue.
“It’s not really going to be a huge difference, it’ll be more on the margin,” he said. “I think most states view this as being something that is very helpful on the margin.”
Viard also thinks the Michigan threshold should be lower if the state really wants to fairly even the playing field between all small brick-and-mortar businesses and all small online sellers. But, he said, it really depends on the size of the Michigan economy and the amount of e-commerce conducted in the state.
“Some sellers that don’t [earn] $100,000 in [one state] and may in Michigan, so some states may need to have lower thresholds or higher thresholds,” he said.
Viard affirmed that some small online sellers may find the tax “burdensome,” but said if they’re making more than $100,000 per year, then the compliance costs shouldn’t really be that burdensome.
“In theory, online sellers could say this is an excessive burden,” he said, but “I don’t think that argument is going to get much traction.”