Stop Worrying and Learn to Love Regulations

Innovation will ease implementation of new rules, as it almost always does.

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David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.

Last Monday, the Senate passed the Marketplace Fairness Act, which will greatly improve the way sales tax is collected (if passed by the House and signed by the president). The act will level the playing field between local brick-and-mortar merchants and big online retailers by requiring sales tax to be collected for online sales based on the state where the customer resides. This eliminates an unfair advantage enjoyed by online merchants that are based in states with no sales tax. (In an earlier column I explained why this is so important.)

Now, predictably, some merchants are complaining that it will be too hard to comply with the bill. They say they'll have to track all their transactions manually, and have to write checks to 50 different states and hundreds of cities that levy their own sales taxes. They say they'll drown in paper work.

No. They won't.

[See a collection of political cartoons on the economy.]

These compliance problems are not going to happen because financial services companies are too smart, too innovative and too entrepreneurial. Financial services firms will seize the opportunity to differentiate themselves by stepping up to handle the tax collection and accounting on behalf of their clients, the merchants.

Let's start with the credit card companies: Visa, Mastercard, American Express and so on. The vast majority of retail interstate transactions are paid for by credit card. The credit card companies know the addresses of all their cardholders. They will offer a service to their merchant accounts that calculates the tax due on every transaction and gives each merchant a full report of sales tax due in every jurisdiction. They can go even farther and, with the merchant's permission, remit the tax to every taxing authority as it is due.

Paypal too has an address for each of its customers and can calculate sales taxes just as easily. If you're selling over eBay, the eBay checkout service knows the address of all eBay buyers and can tally up the amounts due and who needs to be paid. Do you use Google's or Amazon's merchant services? They will provide this service as well.

[Read the U.S. News Debate: Should the Senate Have Passed an Online Sales Tax?]

Automatic sales tax calculation and payment services will cover the overwhelming majority of internet transactions because they will handle tax calculations for all transactions done with credit cards, Amazon, Google, Paypal, eBay and other online payment and merchant platforms. And true mom-and-pop merchants with less than a million dollars in annual sales are exempt from the new rule.

What about the remaining transactions – goods sold by larger merchants that are paid for by check rather than any electronic method? The solution for these merchants will come from vendors of accounting software. All accounting and financial software, whether low-end like QuickBooks or enterprise-level, will soon have tools for calculating the sales tax based on the customers' address. Fierce competition in the software market will ensure that this happens.

The Bigger Picture of Regulations and Innovation

Many new regulations play out similarly to what we're likely to see with the new sales tax rules. At the time the regulation comes into play, those affected are afraid and confused and they envision the worst possible burden of compliance. But the critics don't anticipate the innovation that follows. Every regulation that restricts something also enables something. Every regulation that makes one business practice less profitable makes another more profitable. And every regulation creates an opportunity for the smartest and most innovative providers to show their mettle, differentiate their products and services, and generate higher margins.

[See a collection of political cartoons on Congress.]

When fuel economy standards for automobiles were first passed, automobile manufacturers complained that they would have to make parts from aluminum alloy rather than steel (to save weight) and that would fatally compromise the reliability and safety of their cars. Yet, years later, cars are safer and more reliable than ever (although some car companies that couldn't innovate have gone out of business). And the U.S. is getting ever closer to not needing to import oil from the unstable Middle East.

When the Clean Water Act was passed, many chemical companies shuddered at the cost of compliance. Yet a few seized the opportunity to upgrade their process to produce higher grades of chemical products that command a premium price. At the same time, these companies were able to boost yields and cut the cost of raw materials thanks to better process technology they deployed. The companies that seized the opportunity captured more market share at premium prices. The ones that simply strapped on emissions control equipment were unable to keep up.

Certainly, sometimes badly-designed regulations get through which don't provide any opportunity to innovate, but these are rare and they can be fixed. Most of the time, companies can seize the opportunity offered by regulations to innovate, to capture more market share, to boost margins and leave less resourceful competitors in the dust. All while creating a safer and more sustainable economy and a healthier planet.

  • Read Kenneth Thomas: Young Adults Show Obamacare Is Working
  • Read Pete Sepp: On Internet Sales Tax Bill, the House Must Think of the Constitution
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