Will the Tax Burden Ease for Small Business?

Taxation is seldom viewed in a positive light, but the Internal Revenue Service has put in place a rule that could make the tax burden easier to bear for small businesses.

Taxation is seldom viewed in a positive light, but the Internal Revenue Service has put in place a rule that could make the tax burden easier to bear for small businesses.

On Jan. 1, a new IRS directive went into effect that lets small businesses make quarterly, rather than monthly, employment tax payments. Specifically, companies with less than $2,500 in quarterly employment taxes will be able to make the quarterly tax deposits. Previously, only firms with less than $1,000 in quarterly employment taxes were given that option (go to www.irs.gov/news/nandf.html and select document IR-2000-083 to get the lowdown).

The IRS says the reduced frequency of deposits will mean fewer mistakes, fewer penalties and "will help small businesses on cash-flow issues."

Industry watchers say the IRS ruling could make life easier, but note that a certain amount of fiscal restraint will be in order. Indeed, companies overeager in the spending department could find themselves in a bind when the quarterly tax deadline hits.

Some reseller respondents to an informal ASCII Group poll say they will continue to make monthly payments for the sake of better budgeting. Still, Francis Collins, president of Ad- vanced Digital Solutions, a Fairfax, Va., integrator, sees the IRS move as a positive step that "acknowledges the onerous overhead requirements of running a small business."

A couple of readers, meanwhile, have pointed out a potential benefit in another form of taxation: the sales tax on merchandise sold via the Internet. Today, Web merchants must collect sales tax from buyers located in their state, and from remote buyers in states in which the merchants have a physical presence.

Most reports on the topic have focused on the cost of sales-tax collection. But some observers suggest that an upside to tax collection is the so-called "float"—the value of the tax dollars during the time the merchant holds the money. Smaller retailers may be able to hang on to the money for three months or more before they remit to the applicable revenue authority.

A 1998 Washington State study offers a glimpse into the value of the float. The study pegs the float for small retailers at one half of 1 percent of their total state- and local-tax collections. The study says retailers "can presumably gain some value from the holdings by earning interest … or by co-mingling the sales tax with the rest of their cash flow."

In addition, a number of states let retailers keep a cut of their sales-tax collections. However, a 1999 Ernst & Young study says those discounts are "relatively small" compared to the retailers cost of collecting taxes.

Robert Cline, national director of state and local tax policy economics at Ernst & Young, says the float does not provide much of an offset, either. Moreover, he believes the float will likely decline as revenue departments seek to accelerate the frequency of deposits among large retailers.

Jeff Friedman, a partner with KPMGs e-Tax Solutions practice, agrees that the float probably isnt very beneficial in todays complex sales-tax system. But he points to the Streamlined Sales Tax Project as an effort that could ease the tax-collection burden. Check its progress at www.streamlinedsalestax.org.