Jonathan Orszag, Senior Managing Director of the economic consulting firm Compass Lexecon, published a critique of the definition of small business as written in the Marketplace Fairness Act. Under the MFA, a small business is one with sales of $1 million or less of out-of-state sales; these businesses are the only ones exempted from the out of state sales tax collection duties the MFA imposes.
This inflexible and arbitrary definition is wildly inconsistent with the way the Small Business Administration has chosen to answer the question of what constitutes a small business. The SBA allows the threshold to vary from industry to industry because the economics of different kinds of businesses necessitate different definitions in order to provide the most accurate picture of which businesses are small. In some industries the size of the business is measured by the number of employees the firm has; in others, small businesses are defined by their average annual sales over the previous three years. The number of employees or the sales revenue that acts as a threshold also varies by industry. This is logical because, as Orszag explains, “What is a small business in the economic consulting sector is very different from what is a small gas station and what is a small gas station is very different from what is a small farm or small airline.”
Instead of following the reasonable guidelines set by the SBA, proponents of the MFA advocate a limit that has no data to support the quantity chosen or the measure of out-of-state sales itself. This definition treats industries with clear differences in an indiscriminate manner. Additionally, for many industries, $1 million in sales translates to a much lower profit. Consequently, this definition excludes many businesses that are classified by the SBA as small businesses.
With such a poor definition of small business, the MFA is guaranteed to crush many small businesses under the weight of 9,600 separate tax jurisdictions. Instead of forcing widely disparate industries to comply with the same arbitrary threshold, Congress ought to adopt the SBA definitions. Better yet, they ought to reject the Marketplace Fairness Act altogether.