Government “Study” on Internet Tax Hides Harmful Small Business Effects

WASHINGTON, Nov. 20 – Under presidents of both parties, the Small Business Administration’s Office of Advocacy has produced top-notch independent studies on the harm the tax and regulatory burden does to smaller firms.

So it was especially troubling to learn this office recently produced a study minimizing the harm and purporting to show benefits of new Internet sales taxes on small businesses. John Berlau, a Senior Fellow For Finance and Access to Capital, offered the following statement:

“The trouble is SBA’s advocacy office did not actually “produce” the study. Instead, it paid $80,000 to two longtime advocates for letting states levy sales taxes on remote online sellers to do so. (Hat tip to Andrew Moylan of the R Street Institute for finding the contract!)

For more than a decade, Donald Bruce and William F. Fox of the University of Tennessee’s Center for Business and Economic Research have produced studies that estimated revenue losses at the high end for online sales “escaping” taxation and minimized overall economic effects of allowing states to tax out-of-state sales. In the new SBA “study,” they complain about how states’ lack of remote taxing power works “at the expense of many small ‘Main Street’ vendors.”

The authors then make the bizarre and unsubstantiated claim that only 1,817 online retailers will be affected by the taxes states are authorized to levy under the Marketplace Fairness Act, which passed the U.S. Senate this year and is pending in the House.

The divide between online and brick-and mortar retailers is fading. Some small retailers have a physical location in one or two states yet may sell their products online all over the nation. These “Main Street” retailers suddenly would be subject to hundreds of state and local tax jurisdictions in places in which they have no representation. And there is no income threshold for the audits and demand letters these jurisdictions could shove down entrepreneurs’ throats.

Not content to blow $80,000 in our tax money on a flawed and one-sided study, SBA also is using more tax dollars and staff time to gin up a Twitter campaign for small business support of the MFA. Small entrepreneurs should indeed tweet, but the hashtag they should use is #SBAnofriend.

In addition, CEI analyst Jessica Melugin said of the SBA report, “We spent $80,000 of tax money so long-time advocates of the legislation could cite ‘anecdotal evidence,’ cherry-pick data, change numbers to aid their arguments and cite themselves throughout the paper. This does not a credible study make.

“The paper dismisses the MFA’s constitutional problems, all but ignores the threat out-of-state audits would pose to small businesses and makes no mention of both the consumer privacy concerns and detriment to healthy tax competition.  Perhaps most amusing in light of recent events, the report repeatedly implies that government-supplied software will alleviate tax compliance burdens.”

“It’s a poor paper about an even worse piece of legislation.”