Friday, December 23, 2011

Virginia Small Businesses Lose Again?

To his credit, Governor McDonnell has said that making Virginia the best state for small business as well as the best state in which to do business is an important objective for his administration. 

In rhetoric then, Governor McDonnell is a step ahead of his predecessors, who, among other things, drafted economic development strategies with no small business representation (Governor Gilmore did that) and compromised the state's ability to coordinate services to small businesses by cutting the state funding match for the SBA funded small and women business centers across the state (Governor Warner did that). 

Unfortunately, though, two recent actions don't appear to match the Governor's rhetoric or advance Virginia in the direction of becoming the best state for small business:

1) The Governor's decision to use public funds to bring two Amazon distribution centers to Virginia while promising Amazon that it will continue to be exempt from collecting sales tax from Virginia customers; and
2) The Governor's decision to recommend the elimination of the Virginia Small Business Advisory Board while continuing the Small Business Commission.

Unfair Competition
The Amazon decision appears to continue the past practice of elevating the seduction of out of state businesses to come to Virginia over the interests of and support for existing Virginia businesses. Normally, any business with a physical presence in Virginia is required to collect and remit sales taxes for all sales.  According to the Virginian Pilot, however, the Governor has agreed to allow Amazon to avoid this obligation  by using separate corporations to set up the distribution centers:

>... state officials said Thursday that Amazon won't have to pay sales taxes after it builds the new warehouses, either, because the facilities are being built and operated by a separate distribution company, not the actual retail business.  
"This was solely about jobs and economic development here," said McDonnell, calling the sales tax issue a discussion for "another time."

This means that while the Governor has been effusive in welcoming Amazon to the Virginia corporate family, the company will continue to have an unfair advantage over Virginia-based bricks and mortar retail businesses who have no choice but to collect sales taxes and have had to carry the additional burden of paying those taxes on an accelerated basis over the past few years.

According to the Washington Post, the Virginia Retail Federation, the Virginia Retail Merchants and the Alliance for Main Street Fairness have called on Amazon to collect and pay sales taxes whether legally required to or not:

“Every retailer should be playing by the same set of rules and let fair competition determine winners and losers in the marketplace,’’ the association said in a statement. “It is not appropriate for state and local tax dollars to be used as economic development incentives unless Amazon agrees to collect and remit state sales taxes. If they do not make this agreement, Virginia is likely to be a net job loser with this deal.”
Amazon was reported to have gotten $4 million in incentives as a part of the deal to bring 1350 jobs to Virginia.  The question is whether these jobs at this cost, which enhance Amazon's ability to compete in the region, are worth the continued loss of small business sector jobs among Virginia retailers who can't make up the difference customers perceive in the cost of goods because of the tax free internet sales, even though legally the customers are obligated to pay this tax as a use tax when they file their income taxes.

Silencing a Voice for Small Business Owners
The decision to eliminate the Virginia Small Business Advisory Board (VSBAB) is a decision to eliminate the only mechanism that assures Virginia small business owners a direct voice in advising the Governor and the administration on economic development and other policies that affect Virginia small businesses.  

The VSBAB is made up of 14 business owners (11 from each of the congressional districts and 3 at large) who volunteer their time and expertise to advise the Executive Branch regarding small business issues. The Board's members are appointed by the Governor for 4 year terms, and can only serve two terms.  These citizens, of which I am one, bring the real world experience of small business owners to bear on state policies affecting small business. 

The key statutory responsibilities of the VSBAB are to recommend to the Governor and the administration policies that will enhance the "growth of small business" and to be a resource to the Governor and others as they conduct the "economic development efforts of the Commonwealth."  As mentioned above, the lack of a strong small business voice in the administration led to the short-sighted cuts in the state budget  (under Warner in 1992) that ended the state role in guiding the small business centers across the state.  Over the last few years, the VSBAB has provided advice and recommendations to policy makers on the definition of "small business" for procurement and other purposes and successfully argued against the proposed merger of DMBE, DBA and VEDP as not helpful to small businesses.

In contrast, the Small Business Commission is a legislative branch agency made up of 10 legislators and 4 citizens. While the citizens are required to have demonstrated "small business expertise," none of them are required to be small business owners.  The citizen members of the Commission serve two year terms with no limit. The Commission's role is to "study, report and make recommendations on issues of concern to small businesses in the Commonwealth."  The Commission has had a history of meeting rarely or sporadically over the years.

If the Governor's purpose in eliminating the VSBAB is to save money, the fact is that the Small Business Commission costs the taxpayers more than the VSBAB.  Legislative members of the Commission receive compensation of $200 per day for attending meetings plus per diem for expenses ($169 for Senate, $135 for House). Citizen members of the Commission are authorized $50 a day plus expenses.  The Code says that VSBAB members serve without compensation, and members have for the last several years voluntarily refrained from seeking any reimbursement for expenses, unless extraordinary (like travel from far Southwest).

If the Governor's purpose is to enhance efficiency by eliminating duplication, it would make more sense to recommend that the Small Business Commission be eliminated than the VSBAB. The VSBAB is the only mechanism that allows small business owners a direct voice in advising the Governor and the administration on policy. Legislators serving on the Small Business Commission have other means to participate in policy development on committees and subcommittees of the House and Senate that meet regularly during Session and also between sessions.  Citizen members of the Commission are a small minority of the membership and do not have to be business owners.

It would seem, then, that both of these decisions can be seen as adverse to the interests of the small business community and the Governor's express goal of making Virginia the best state for small business.  Both deserve to be reviewed carefully by the Governor and by legislature during the 2012 session with an eye toward leveling the playing field and continuing to afford Virginia small businesses a direct voice in advising on state policies.

NOTE: I serve on the Virginia Small Business Advisory Board having been appointed and reappointed by Governor Kaine.  My current term expires in 2012 whether the Board is continued or not.