As part of an effort to pass unrelated legislation, Senator Nelson has introduced an alternative to Senator Johanns' proposed out-and-out repeal of the 1099 reporting mandate (i.e. the disproportionate, paperwork nightmare of a terrible, tiny tax). The proposed Nelson amendment would do several things:

1. Exempt businesses with 25 or less employees, at any point in a given year, from reporting;
2. Raise the yearly threshold for reporting from purchase made from a business that total $600 to $5,000;
3. Exempt credit card purchases; and
4. Instruct the Treasury to issue rules that provide exceptions for payments which bear minimal risk of non-compliance.

If this were adopted, not only would 1099 filing requirements become even more complicated than in the health care reform bill, but it would deter millions of dollars in sales from small companies to larger companies. Let’s explore the carve outs.

Businesses with 25 employees will not have to report, if you have 26 you do. Well guess what that employer is thinking before he makes that 26th hire? He or she will not only have to take into account the productivity return on the investment of taking on a new employee, but also the added accounting costs that he will have to incur. And sadly the inverse is true, employers will also have a strong incentive to look at the possible reductions in accounting costs versus reduced productivity in trimming down to the 25 level.

So how about raising the threshold from $600 to $5,000? Sounds reasonable until you realize governments, nonprofits and businesses will most likely still have to track everything and collect the tax information from their vendors since they have no way of determining whether that first purchase from a vendor will be the last or if it will eventually aggregate to $5,000 for the year. The random carve out may make it even more complicated.

Credit card purchases were already going to be exempt.

Now for the provision that will be most troublesome for small business. The Nelson amendment instructs the Treasury to issue rules that provide exceptions for payments which bear minimal risk of non-compliance. Well this would mean to me exempting publicly traded companies. Governments, nonprofits and businesses would have a choice, to buy supplies from Joe’s Stationary and report to the IRS or buy from the national chain and not have to report at all. Guess now small businesses will become second class citizens since they will be the ones that will lose out. And how about the stigma this places on the millions of honest small businesses?

So how does exempting all of these additional information help the IRS catch the bad guys? Not sure, but this amendment is not ready for prime time. In fact, there is quite possibly no effective way to fix this ill-advised, onerous provision. It should be repealed -- end of story.

// Updated from an earlier version attributing the amendment to Senator Baucus