April 14, 2011, 10:10 AM

Another taxing situation for e-commerce

A online sales tax bill appears headed to Congress. 

Paul Demery

Managing Editor, B2B E-commerce

Lead Photo

Federal legislation that would allow states to mandate sales tax collection by Internet retailers may soon be introduced by Sen. Dick Durbin, a Democrat from Illinois who is also the Senate’s assistant majority leader.

Durbin’s office declined to confirm that a new online sales tax bill was in the works, but sources close to the matter say the senator is primed to introduce legislation  as early as this spring. Since 2000, lawmakers have introduced similar bills in every two-year session of Congress. Privately, online taxing experts say this year’s attempt could have a higher chance of success not only because of Durbin’s leadership role, but also because states face mounting pressure to find new revenue.

The bill, expected to be similar to the Main Street Fairness Act legislation introduced last year, would allow states that are members of the Streamlined Sales Tax Project to require all but the smallest of Internet and catalog retailers to collect sales tax regardless of where they have physical operations. Current federal law says states can’t force tax collection by retailers if they don’t operate in-state facilities such as stores or distribution centers.

Twenty-four states are already members of the Streamlined Sales Tax Project, or SST, though most have some final steps to take before they could mandate sales tax collection under a new federal law, says Scott Peterson, executive director of the SST’s governing board. The most important remaining step is passing local laws that would establish compensation of Internet and catalog retailers for the cost of collecting sales tax.

Under rules established by the SST, participating states would share 0.75% of sales tax revenue collected on Internet and catalog transactions with the retailers that collected the tax, Peterson says. To help small retailers absorb the cost of tax collection, the formula for distributing that revenue among retailers would compensate small merchants at a higher percentage of their sales compared to how larger retailers are compensated, Peterson adds.

Beyond that 0.75% amount shared with retailers, SST member states would also share some of the collected sales tax revenue with SST-certified providers of sales tax collection software to cover the cost of that software if it’s offered free to retailers. The SST rules exempt from sales tax collection duties those retailers with less than $500,000 a year in sales to customers outside of their own state. That threshold was raised in December from $100,000 in response to concerns by business groups, which said that tax collection would prove too onerous for smaller retailers while producing negligible increases in revenue for states, Peterson says.

Durbin’s bill, which sources say is likely to be accompanied by similar legislation submitted in the House of Representatives, seeks to overturn federal law that has stood since a 1967 U.S. Supreme Court decision, upheld by the high court in 1992, that said states could not legally require retailers to collect sales tax from their residents if the retailers don’t have an in-state physical presence. The 1992 ruling, however, noted that Congress could pass legislation establishing new sales tax policies.

Proponents of the Main Street Fairness legislation include large retail chains that already collect sales tax on online and catalog orders in states where they have bricks-and-mortar stores, as well as cash-starved states. They contend that such a law would create a relatively equal tax structure for online and offline retailers while also enabling states to recoup billions of dollars of tax revenue that now goes uncollected. A University of Tennessee study often cited by proponents of the legislation estimates that this revenue would amount to $23.3 billion in 2012.

In lieu of new federal legislation, several states such as Arkansas have pushed through their own sales tax laws, such as those that require Internet retailers to collect sales tax if they do business with in-state affiliate web sites.

Opponents, including web-only retailers, contend that forcing them to collect sales tax on online purchases could stifle the growth of online commerce. States generally require consumers to remit the applicable sales tax on goods they buy online or by phone, but few consumers do.

 

Comments | 10 Responses

  • Thanks for the great article. I did want to comment on one part: "Proponents of the Main Street Fairness legislation include large retail chains that already collect sales tax on online and catalog orders." Just wanted to point out that small mom-and-pop stores are also supporting the legislation. I've heard many of these local retailers testifying before state government committees about the sales they've lost to online retailers and how shoppers are coming into their stores, browsing and asking the clerks questions, and then saying "Thanks, I'm going to go order it online." This seems to be especially true of high-end products where the sales tax can amount to over a hundred dollars, like electronics and cameras. It's so important to level the playing field for these local retailers. They may still face an uphill battle, competing with online shops that have no overhead and a much bigger selection than any single bricks-and-mortar store can carry, but they shouldn't have to charge sales tax if online retailers don't. It's an unfair loophole that gives online retailers an unfair advantage. Also, although you didn't mention it, some opponents of online sales tax are claiming that it's too difficult for small online retailers to calculate and collect sales tax. Technology has solved that problem, and the company I work for, FedTax.net, offers a comprehensive sales tax management service called TaxCloud (http://taxcloud.net) that's free to retailers. TaxCloud instantly calculates the sales tax due, files tax returns for the retailer, generates state-by-state monthly reports, handles audits and exemptions, and more. With free services like TaxCloud available, even the smallest online retailer can easily calculate and collect sales tax.

    • I suggest that there's a bigger problem than taxes for the mom & pop stores, and it doesn't only pertain to high ticket items. The sales tax blues they're crying about it a ruse, a red herring. By advocating online sales tax, they are bing dupes of the big retailers and arguing against their own interests. (That seems to be in vogue, nowadays). Tax or no tax, mom & pop's problem is that many on-line retailers, especially the bigger ones, are simply significantly cheaper. A 6, 7, or even 8% tax is NOT going to even out the pricing disparities. The small B&M stores are being used for research by customers who have no intention of buying there in the first place, even if they themselves were exempt from taxation. If the customer is in a hurry to get the goods, they'll research online and at the mom & pops, then they'll go to WalMart or Target or Best Buy or some other big-box where nobody knows anything about the products on the shelf. If they're not in a hurry, they'll go to Amazon or Buy.com, or Newegg, or another online retailer with a lower price, even if they have to pay sales tax. Is this fair? Of course not. But as someone who detests big box stores, especialy the "Marts", I haven't spent $500 in the last 3 years in a B&M store, and it's got absolutely nothing to do with taxes. Years ago I gave up trying to find equivalent merchandise locally within 10-20% of the online price. I don't use mom & pop for my research either but, then again, there are precious few mom & pop stores within 50 miles of where I live. They weren't killed off by online retailers. They were killed by big-boxes and chain stores. I refuse to patronize the big boxes, but even THEY can't compete with online retailers, taxes or not. Taxing online sales isn't going to do a thing to help mom & pop even the price differentials between them and the big box or online retailer. The big-box stores will be the only ones to benefit because they have become the first or second choice for a majority of shoppers. If online retailers are hurt badly enough to make it difficult to research a purchase online at their sites, mom & pop can look forward to more of those browsers, those customers who ultimately purchase from the same big-box who is undercutting their prices. Mom and pop have chosen dangerous befellows in teaming up with the Marts about this issue. They should be careful what they ask for because they just may get it.

  • BTW, Erin, could it be that your company stands to gain a significant amount of tax revenue if online retailers are forced to collect taxes for the State? Perhaps the fact that B&M stores don't have to charge S&H on individual items as they are sold should also be considered an "unfair advantage". Maybe Mom and Pop should be assesed an $8.50/lb tax on their sales. Mom and Pop also derive benefits from pumping up their state/city/county's treasury with sales taxes. As an online retailer, what do I get for the tax money I collect for a state on the other side of the country? Maybe Mr. Durbin should propose a single National sales tax on online purchases. The proceeds could be used to improve our 3rd world broadband infrastructure an fund anti-internet fraud initiatives. I'd wager that the big boxes, chains and mom & pops would be singing a different tune about that. I suspect that "unfair advantage" nonesense would be put back in the closet, where it belongs.

  • One last thing. I just re-read Erin's post. She mentions that B&M stores have a problem with people just "browsing", then buying online especially for high end items where the sales tax can be $100 or more. Where I live, it takes a $1500 item to generate $100 of sales tax. Think about that. If online sales were taxed at the same rate, at what price would I have to find that item in order for it to be worth buying online, rather than at a B&M? About $125 cheaper. That is extremely easy. That could likely even be done at a big box store. More likely, I go online and for $1200-$1300 find anything that mom & pops wants $1500 for, especially electronics. $1500 x 1.07 = $1605 at M&P's B&M. Online, $1200 x 1.07 = $1284 + $50 S&H = $1334. That's a savings of $271. Bottom line is that the typical B&M cannot even compete with the big boxes on price alone. To think that they can come so close to the prices of online retailers that sales taxes can "level the playing field" is nothing short of delusional. The only thing they have to "level the playing field" is service. Service, service, service. And more service. Until gas costs $400/bbl and it costs $500 to ship a table lamp, they will NEVER be able to compete with big boxes or online retailers solely, or even signficantly, on the basis of price, regardless of taxation.

  • I do not buy the mom & pop unfairness idea. Mom and pops have to deal with unfairness on MANY levels, it's called competition. I love the big box stores (not always, but as a rule) because they offer excellent value on a huge selection of products. They used to be mom and pops too, but they scrapped and fought their way out of the fray and into the lead. Competition. It's the cornerstone of capitalism, so we might as well get used to it (pray it stays that way, btw). It's no different with Internet retailers. As a guy that is currently building several web businesses for my employer, I can say it's downright frustrating that the big dogs have superior supply chains, processes, manpower, pricing and expertise that blows my little operations out of the water. Again, tough. It's competition. My job is to quit whining and come up with a USP that customers will like better than the other guys. Another thing. $23.3 BILLION. Awesome, go states, looks like your budget woes are now in your rearview (until next year when you escalate spending and continue to run businesses out through suffocating taxation and regulation), right on top of the consumers that you just steamrolled. Yep you just pickpocketed that $23.3 billion right out of consumers' Levis, don't forget that. But no, that's fine, but just don't preach to the world about "draconian" budget cuts of $60 billion - hem, Mr. Durbin - when you're gleefully continuing the fiscal rape-fest of the American consumer. When will you guys 'fess up and admit it's not about money or equity, but control?

    • I've been called a yuppie by my own father (yeah ouch), though I usually just bypass B&M stores entirely when purchasing something important and go right to Amazon, et al. Call me what you like, but yes I do gripe about potholes in the road and here's why: The expectation of proficiency in diverse, dynamic conditions. I know that's a tall order for government, but government should have to adapt just as much as any other business. If a company built on the "beanie baby" craze goes under when people realize it's no longer trendy to gather such useless dust collectors, everybody just says "serves em right". But ask government to adapt to changes in the economy, consumer habits, etc, and "dear Lord they're going down!" And the government has the full backing of the U.S. penal system if it's "customers" don't pay for it's "product", (talk about a sweet deal). And yet they still complain and belly ache. Nope, not flying with me. Fix the potholes AND deal with changeable tax revenues.

  • I own a B&M store and 3 years ago began an online store. While its certainly true that my B&M store can't compete with online stores, it is not for lack of marketing savvy or greed. The simple matter of fact is that few online retailers have the kind of overhead that B&M stores have like rent, utilities and payroll, to name a few. While the folks that Pete mentions may use that fact as the reason to claim the B&M model is dead, there is also a downfall to the very online model they run to. Such as, zero dollars going back into your communities for jobs, tax coffers to repair roads, etc. And for some reason, I'm thinking that the very self centered yuppies that use B&M retailers for their research are the very same first fools to cry foul when potholes appear on their precious streets. As an additional note, I would encourage B&M store owners to try the online store model. Our store is now three years old and we're growing rather significantly every year. Rather than fighting the world and the self centered human nature, we decided to embrace it, give them our own sight with online savings and many as a result buy from us. Last note, our B&M store sales are flat but we're no longer experiencing a sales decline. With this economy, we've lowered costs and right now it too is sustainable.

  • As far as taxes and Durbin's bill, I am dead set against it. How many years would it take spending, greedy political pigs to take back the bribe mentioned in the bill? One thing I'll agree with Pete on, the taxes are not the main street issue at all. Rather, it is the luxury of the modern marketplace that comes to shoppers with mobile phones, PCs wherever they are. Either embrace it or sell.

  • This attempt was expected but whether or not they can pull it off, time will tell. Lawmakers never had the foresight to realize the power of the internet, otherwise this would have been set in place, years ago. If it does come to pass that online retailers have to collect from various states there are options but most important, your technology provider should have all this worked out by now, if not you had better start assessing your situation. I do business development for Zoovy and we have a very robust tax collection piece built directly into the platform. This combined with our QB integration would make the task of not only collecting the taxes but reporting them much easier for most small to midsize businesses. In regards to the larger businesses there are also many options for them to access one of a few native feeds to retrieve and push this info into a larger ERP if required.

  • they are going in the wrong direction. make online and offline sales tax exempt.

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