Marketplace Legislation Could Harm Small Businesses, Consumers, and Sellers
As Congress considers bills like COOL and De Minimis, policymakers should consider the possible downstream impacts to sellers and consumers.
Congress is currently considering major marketplace legislation — like the Country of Origin Labeling Requirement Act (COOL) and changes to the De Minimis exemption. Both proposals aim to provide more insight into the products that Americans purchase online.
In addition to those proposals, Congress also passed the Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers Act (INFORM) in late 2022.
INFORM requires third-party sellers with over $20,000 in annual sales to provide online marketplaces with detailed information about their business including bank account numbers, contact information, and tax ID numbers.
COOL mandates that products sold online must clearly disclose their country of origin, thereby banning the sale of products that fail to comply.
The De Minimis bill seeks to amend current law by requiring goods claiming duty-free exemption to be shipped through U.S. companies. These U.S. companies, called “Contract Carriers,” are required to provide detailed shipment information for each item claiming the exemption.
While well-intentioned, marketplace legislation is likely to have downstream effects on consumers, sellers, and small businesses. These include:
- Increased compliance costs for sellers.
- Increased burdens on small businesses.
- Increased prices for consumers.
Let’s take a closer look at these consequences.
Increased Compliance Costs for Sellers
Marketplace legislation will increase compliance requirements for sellers, making selling online more difficult and costly. Some businesses may choose to discontinue online sales altogether, potentially leading to a reduction in competition within online marketplaces. This, in turn, could further entrench the market power of larger, more established sellers.
Steps sellers must take to comply
Currently, sellers must review many policies in order to meet compliance requirements for online sales.
In addition to the current requirements under INFORM, both COOL and the De Minimis bill would require sellers to report more information for each item being sold, including:
- Country of origin
- Country of manufacture
- Shipper of record and/or contract carrier
- Importer of record
- Description of the good
- Value of the good
The graph below shows the current reporting requirements for INFORM and potential new reporting requirements for the proposed marketplace legislation.
If enacted, these bills will increase already complex and burdensome requirements for smaller sellers trying to build their e-commerce businesses.
Increased Burden on Small Businesses
Small businesses are affected the most by federal regulations. That’s because small businesses face greater compliance challenges due to limited resources and less experience, while larger, more established businesses can adapt quickly to new regulations.
Research indicates that ever-increasing regulations impact the growth and success of small businesses.
In 2010, the U.S. Small Business Administration’s Office of Advocacy published data on the cost of regulatory compliance per employee. The analysis split businesses into three groups based on size — fewer than 20 employees, 20 to 499 employees, and 500 or more employees.
Adjusting for inflation, the graph below displays annual per-employee compliance costs for federal regulations, shown by business size.
Note that this graph does not account for any additional federal regulations enacted since 2010, so in reality, the costs are likely larger than displayed above.
Overall, small businesses incur the highest per-employee cost of complying with federal regulations.
In sum, marketplace legislation will likely increase compliance costs for businesses, especially small businesses with less compliance experience.
Over-Removal of Products
E-commerce sellers also face the potential of online marketplaces over-removing their products in order to minimize risk.
When this occurs, listings that miss even minor compliance requirements are removed until all have been resolved.
Overall, the over-removal of ‘risky’ listings, which will likely increase with marketplace legislation, can result in substantial lost revenue until listings are reinstated.
Increased Prices for Consumers
As compliance costs increase for sellers and marketplaces, consumers could see higher prices as businesses pass these costs to consumers.
A 2019 report from Alan McQuinn and Daniel Castro for the Information Technology and Innovation Foundation (ITIF) explained how companies typically respond to changes in cost due to compliance.
“When companies are required to devote resources to regulatory compliance, they usually either reduce investment in improving existing products and services or developing new ones, or pass at least a portion of the costs on to consumers.”
A journal article by Dustin Chambers, Courtney A. Collins, and Alan Krause found that consumer prices increase in response to regulatory burdens. Notably, their study found that low-income households “face larger regulatory-induced price increases than high-income households”. This is because low-income households spend more money on necessities, which tend to be subject to more regulations.
Overall, the proposed marketplace legislation will likely increase consumer prices, potentially impacting low-income households the most.
Conclusion
As Congress considers marketplace legislation it is important to recognize the downstream impacts to sellers and consumers. E-commerce sellers already face a number of requirements and barriers in order to sell products online. Increases in compliance requirements make selling online even more difficult.
For sellers, additional compliance requirements increase the complexity and cost of operating. Small businesses whose resources are more limited than larger businesses, face higher per-employee compliance costs, putting them at a disadvantage compared to older businesses.
Consumers could also face higher prices as businesses adjust to new compliance costs, passing the costs onto consumers. Furthermore, the increase in prices may affect low-income consumers the most.
In sum, marketplace legislation may harm small businesses and increase prices for consumers. Policymakers should be aware of the potential downstream impacts of marketplace legislation.
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