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The Sales Tax Issue Is Alive and Well
The issue of levying sales tax on online purchases has pitted pure-play e-retailers against brick-and-mortar retailers and shopping center owners. While surveys show consumers don’t care, retailers, Internet advocates and lawmakers are battling.
It’s been crawling to this point for months, and finally the Senate is acting. On March 14, the Senate Commerce, Science and Transportation Committee started hearings on Internet taxation. The issue: whether to extend the Internet Tax Freedom Moratorium and whether that moratorium should include sales taxes.
Since the moratorium will expire in October, most are expecting the Senate to act this session. While the moratorium doesn’t deal specifically with the issue of sales taxes, sales-tax advocates are hoping they can tie the issues together. “Congress is going to act this year to extend the current moratorium which bars new and discriminatory Internet taxes,” says Sarah Whittaker, senior director of government relations for the National Retail Federation. “We hope to get sales tax attached to that.”
Observers say Congress seems likely to extend the new-tax moratorium. They say proponents of online sales tax collection need to use this debate to make their case. “It will be important for the states to use the debate for the moratorium as a platform to get the word out that the Internet is not tax free, that taxes should be paid on the Internet,” says Jeremy Sharrard, associate analyst with Forrester Research, which has researched the sales tax issue. “The moratorium will likely have loose language to allow Congress to revisit this thing in a couple years.”
Like its bricks-and-mortar membership, the NRF supports changes that allow states to require remote sellers to collect and remit sales tax. Not only chain merchants, but shopping center owners as well support the NRF position. The pure-play online retailers, not surprisingly, oppose sales taxes. “Local brick-and-mortar stores do not have the same shipping and handling expenses as do catalogers and pure-plays,” says a spokeswoman for pure-play computer, computer supply and peripherals retailer Egghead.com.
The big sleep
The issues are as old as Internet retailing-and even older since this battle was fought by cataloguers 20 years ago. The issue-at least to states and retailers-is hot. But when it comes to consumers, it’s a different story. “Sales tax is a little issue, not nearly the issue opponents of sales tax would have you think,” Sharrard says. “Shoppers are far more willing to be dissuaded from shopping at a site by high shipping and handling fees than by taxes.”
A Forrester survey of 8,900 online buyers last year revealed that only 22% regularly shop around to avoid sales tax online and only 13% abandoned shopping carts because of sales tax. The same study showed that for 67%, shipping costs were more important than sales tax and that 56% would not alter or only slightly alter online shopping if a universal sales tax applied. “It’s not a huge issue,” Sharrard says.
Some real-life experience backs up that research. Frank Julian, operating vice president and tax counsel with Federated Department Stores, says his company put Bloomingdale’s by Mail catalogs in Bloomingdale’s stores and began collecting taxes from wherever there was a Bloomingdale’s. “We thought we would see a sales decrease in those states because we were now collecting sales tax,” Julian says. “We did not.”
So why is the issue creating so much heat? For one thing, some retailers think it’s an issue. The lure of no sales tax may not mean much to the person buying a book or a CD, says a spokesman for Circuit City, which operates a retail web site in addition to its 629 stores in 155 markets, and collects and remits tax from all its web sales. “But when you’re buying a $500 DVD player, you tend to be more concerned,” he says. As evidence, he notes that PC sales jumped in February when Pennsylvania had a sales tax holiday for PC purchases. And while it’s true that bricks-and-mortar merchants were exempt from the sales tax as well, the anecdote is evidence that the level of sales tax can affect sales of products.
Measuring the drain
Another reason the issue is so contentious is that states have a lot at stake. For instance, Wisconsin looses $20 million per year in uncollected sales tax from e-commerce and another $100 million from catalog sales, estimates Diane Hardt, tax administrator for the Wisconsin Department of Revenue. While $120 million may seem like a drop in the bucket when a state collects $3 billion in sales tax, the uncollected tax is still money that the state could use to pay for very needed services, Hardt says.
Sen. Byron Dorgan (D-ND) said at the beginning of the committee hearing that taxing jurisdictions collect about $160 billion in sales tax, an amount equal to spending on elementary and secondary education. Forrester estimates that lost sales tax from b2b and b2c e-commerce will reach $13.7 billion per year in 2004. The Forrester estimate is based on its estimate that online retail will reach $155 billion in 2004. Forrester based its calculation on the actual sales tax rate from each state and surveyed 100,000 online customers to estimate how much was purchased from each state for b2c and used a national average of 6% sales tax for b2b.
Those who are more concerned about the sales tax issue are those with the most to lose and gain-the states and the retailers. Both sides are lobbying the U.S. Senate about the inclusion of the sales tax issue on the moratorium bill.
On the Hill
At the March 14 Senate Commerce Committee hearing, proponents from both sides made their case. The Senate has two bills in the committee: S 512 sponsored by Dorgan/Enzi and S 288 sponsored by Wyden/Cox. Both bills contain some provisions for Congress to consider letting states collect online sales tax after tax code simplification. The Wyden/Cox bill contains more specific guidelines for how simplification is to be met-the most profound being a single tax rate and uniform definitions for exemptions. A House version of the Dorgan/Enzi bill is being prepared for introduction.