August 1, 2010, 12:00 AM

Tax Attack!

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GSI Commerce does have detailed data, at least for one client. This online retailer, which GSI did not name, established a physical presence in certain states and thus had to collect sales tax there. Sales in those states dropped 12% over the nine-month period GSI studied in 2008 and 2009, says Fiona Dias, executive vice president of strategy and marketing. “When we think of how retailers have to fight for every bit of sales and every point in their conversion rates, this is a very big deal,” Dias says.

Dias adds that the client retailer sells a wide assortment of merchandise. The decline in sales was steepest among the retailer’s most expensive items, she adds.

Earlier studies have suggested that collecting sales tax would cut into online purchases. A study in 2000 by the University of Chicago said sales would reduce the number of online consumers by 24%; a 2002 study by Jupiter Media, which has since been acquired by Forrester Research Inc., found that 13% of consumers had abandoned an online purchase because of sales tax; and a 2005 study by economics professors at Georgia State University and Niagara University estimated that sales tax would cause online sales to drop by 6%.

But others say that, while sales tax can impact sales, the effect diminishes over time. One retail executive who asked to remain anonymous said sales at his former multichannel retailer temporarily declined about 10% after it started charging sales tax in a state where it opened a store for the first time, which meant it had to charge sales tax. “Sales recovered after a couple of years,” he adds.

Some experts argue that consumers shop online more for the convenience than for tax breaks.

In a recent study by the International Council of Shopping Centers, 49% of consumers say a big reason they shop online is because many Internet retailers don’t charge sales tax; when including consumers who say this is at least “somewhat important,” that figure rises to 79%.

But the same study also found that shopping convenience and time-saving plays an even bigger role in choosing to shop online, with corresponding figures of 72% and 93% calling those factors very or somewhat important.

Warning on high-priced goods

A sales tax likely would have the biggest impact on online sales of high-ticket items, experts say. “We believe this could include sales in high average sales price categories, such as jewelry and top-tier consumer electronics, where the online tax savings can be substantial,” says Colin Sebastian, an analyst who follows e-commerce stocks for Lazard Capital Markets.

Goldspeed’s Kugelman agrees. “Over the last two years, people have become a lot more price-conscious, and as Internet retailers pass the cost of sales tax on to their customers, it will hurt sales,” he says.

Even more troubling to Kugelman and some other retailers is what it would cost to accurately charge sales tax in over 10,000 tax jurisdictions. “The cost could be prohibitive,” Kugelman says. He expects that tax calculation software applications will either be expensive or take up a lot of his staff’s time.

Dealing with compliance costs

The SST Governing Board estimates that the cost for merchants to collect sales tax ranges from about 13.5% of collected tax for small retailers to 1.5% for large retailers. SST has been working with tax software vendors to ease the burden, Peterson says.

The board has certified six sales tax software vendors that are listed on the SST web site, StreamlinedSalesTax.org. All offer software applications that states will subsidize for web and catalog merchants that volunteer to collect sales tax when they fall under the radar of nexus—which for this purpose the SST says means having $50,000 in either payroll or property value in a given state.

One of the certified software providers, The Federal Tax Authority, a private company also known as FedTax.net, launched last month its TaxCloud software-as-a-service application that it plans to offer SST-participating merchants for no charge.

“A merchant using TaxCloud doesn’t have to know anything about sales taxes other than where it’s shipping from, where the customer’s destination is, and the class of goods the customer is buying,” says R. David Campbell, co-founder and CEO of FedTax.net. He says most retailers can sign up for TaxCloud and begin using it in 20 minutes.

FedTax.net, which expects to serve mostly small and mid-sized retailers, will earn its revenue from states, taking from 2% to 8% of the sales tax revenue that merchants collect with TaxCloud, Campbell says.

Using any of the certified software providers also offers another benefit. Because the vendors have all worked with the SST to build systems that can calculate sales tax accurately in all SST member states, the retailers who use the certified software will not get audited for sales tax policies, Peterson says.

In addition, the SST has been working with its member states to come up with a standard formula for compensating retailers for part of their cost of collecting sales tax. “We’re trying to get compensation equal to about 1% of their total sales tax collections,” Peterson says.

Whether merchants will have to concern themselves with new tax software hinges on whether Congress finally passes legislation enabling SST member states to collect sales tax on web purchases. The Delahunt bill is now before the House Committee on the Judiciary, which is chaired by bill co-sponsor Rep. John Conyers (D, Mich.), and Sen. Mike Enzi (R, Wyo.) has been preparing a Senate version for introduction this summer.

Economic pressures on the states and the federal government, combined with the support of key legislators, give these bills more chance of passage than they’ve had in the past, some observers say.

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