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The ultimate question is what will happen when most online retailers have to charge sales tax. The impact may not be as big as some suppose.
I’m a big sports fan, but lousy at predicting who will win tomorrow’s game. Maybe I should switch to handicapping political contests.
My prediction in a July 13 blog post that California and Amazon.com would find a face-saving way out of their confrontation over online sales taxes proved on the money. A deal reached this week puts off for a year California’s plan to require larger e-retailers like Amazon to collect sales tax. The face-saving quid pro quo for the state was Amazon’s agreement to push for a federal law that would lead to more online retailers collecting sales tax on online purchases in the same way that retailers in physical stores add sales tax.
While it’s hard to predict if the Cubs’ starter will have his best stuff tomorrow, it was pretty easy to see that both California and Amazon had a lot to lose if the state didn’t back off its plan to extend sales tax to more online purchases and Amazon went ahead and pushed for a referendum to put the question to the voters.
California state officials would have been in the position of trying to convince voters to agree to pay more taxes, not an easy sell these days. And, if there had been a referendum, proponents of the online sales tax—mainly the retail chains that have to charge sales tax on most online sales because their stores give them a physical presence in most states—would have spent the next several months painting Amazon as a greedy, tax-dodging scalawag. Not what Amazon’s marketing department had in mind.
Cooler heads prevailed, on both sides.
For now, the question heads back to Congress, which has for years given little consideration to a proposed law that would allow states that have made sales taxes less complex by participating in the Streamlined Sales Tax project to force all but the smallest online retailers to charge sales tax. If Congress passes such a law, it would effectively override the 1992 Supreme Court decision that allows states to force sales tax collection only on retailers with a physical presence in their states, such as stores or distribution centers. Laws to that effect have been before Congress for several sessions without going very far. But, given the budget problems of the states, there is a chance this bill could pass within the next year, or so it seems to me. (Check back next year to see how this political prediction pans out.)
Meanwhile, the question for retailers of all types is this: How big a deal will it be if online retailers charge sales taxes? A recent survey by Forrester Research suggests it might have an impact, but not as much as some seem to believe. The survey found 44% of consumers paid sales tax on their most recent online purchase, 38% did not and 18% couldn’t recall. Only 25% were sure they would have shopped elsewhere if the e-commerce site had added sales tax.
E-retailers certainly don’t want to lose 25% of their sales, but keep in mind this survey was taken during the second quarter of this year, when there were other web sites shoppers could go to that didn’t charge sales tax. Once the day arrives‑‑and I believe it’s not far off‑‑when most retail sites must charge sales tax, the choice for the shopper moves from whether to pay sales tax to whether to buy online or go to a physical store to make a purchase.
Surveys consistently show that consumers increasingly shop online not for the lowest price, but for convenience and a deeper selection than they find in stores. Those e-commerce advantages are not going away, and neither are online shoppers, regardless of how Washington ultimately settles the sales tax question.