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.
With the moratorium set to expire in October, most experts believe some action will happen before then. Whether that action includes sales tax amendments or simply an extension of the moratorium is unclear.
Central to the sales tax debate is the issue of competitiveness. Traditional brick-and-mortar stores (many with Internet retail sites) say that not forcing remote retailers to collect sales tax creates an uneven playing field.
Peter Lowy, CEO of Westfield America, which owns 39 shopping centers that host 5,048 retail stores, and chairman of the E-Fairness Coalition, told the Senate committee that if one retail sector must collect sales tax then all retail sectors should. The coalition is an advocacy group for the collection of sales tax across all retail channels. It has 64 members including Kmart, Radio Shack, Wal-Mart and The Gap. “Extending the moratorium without taking steps towards a comprehensive solution would be a clear signal that Congress is willing to ignore a major national inequity in order to provide some businesses with preferential tax treatment,” Lowy told the committee.
The NRF’s Whittaker agrees that what is good for one is good for all. “One channel should not have an advantage over another,” she says. “Nobody likes sales taxes, but if you’re going to have them, make them fair.”
E-retailers, however, believe that requiring them to collect sales tax from the more than 7,600 taxing jurisdictions in the U.S.—many of which have differing rates and definitions of what is taxable—is far from fair. In fact, they argue, it is burdensome and puts them at a competitive disadvantage.
While Egghead.com claims that its shipping costs offset its tax advantage, others don’t buy the argument. Says Whittaker: “How do you think brick-and-mortar stores get their merchandise to the stores? We still pay shipping and handling.”
However, Julian says Egghead’s claim has some legitimacy because retailers must collect and remit a shipping tax on items they ship. This tax does not apply for retailers receiving shipments.
Bottled water, low boots
In Wisconsin bottled water is taxed only if it is carbonated. Doughnuts in Pennsylvania are exempt from sales tax unless they are sold at a carnival. Boots that come above the knee are taxable in Minnesota, while those below the knee are exempt. These are some examples of the quirky tax rules across the U.S. And Congress is not likely to move on requiring online sales tax collection unless jurisdictions reach some degree of simplification.
The
most notable effort to simplify state sales tax is being conducted by a group
called the Streamlined Sales Tax Project. The SSTP is a 1 1/2-year-old program
with 29 active states and 10 observing states. Hardt says the group’s first
hurdle is to find common definitions of what is taxable and what is exempt.
This has been difficult, but progress is being made, she says. So far, the SSTP
has reached agreements on food and clothing definitions. “Already their effort
has had more success than any previous effort,” Sharrard says. “States have
realized for a long time that this is a problem and the Internet has created
new urgency.” He says that during the next two years the group will likely get
some states to pass state legislation agreeing to a streamlined system. “They
need to secure some early victories to keep the momentum going,” he says. “They
have a huge uphill battle just convincing legislators that by voting for this
they are not taxing the Internet.”
Sharrard predicts that by 2005 states will have the reforms in place and the
technology to collect sales tax will have been used enough to prove its viability—giving
Congress what it needs to grant the states authority to require tax collection.
Hardt says she agrees with this timetable.
While tax code simplification will go a long way to reducing the burdens associated
with collecting sales tax, technology also stands to play a key role.
“If the states can give technology vendors a degree of administrative simplification
(such as standardizing the number of times per year a state can change its tax
rate), then they can take the ball and run with it the rest of the way,” Sharrard
says. “The SSTP has been real good about having the technology involved and
crafting legislation that can work with the technology. These companies could
put systems in place even with the administrative tangle that exists, but it
would be prohibitively expensive. With administrative simplification and if
states step up and fund the initial setup, you get to a situation where it is
reasonable to expect retailers to collect tax.”
The writing on the wall
But one technology vendor, esalestax, says tax collection can be done now at a reasonable cost. Vertex Inc. and Taxware also sell systems for online tax calculation and collection. Esalestax is an application service provider of tax software for merchant clients. During check out, software the merchant installs contacts esalestax with the items, the total cost and the buyer’s address. In about 2 seconds esalestax returns the tax due to the checkout page. The company gets its tax data from Commerce Clearinghouse; the data is updated monthly. Esalestax clients pay a one-time $149 fee, plus 12 cents per transaction for fewer than 1,000 transactions per month. The cost decreases as transactions increase; clients with 10,000 or more transactions per month pay 8 cents. There are no update fees.
This system is not difficult to install. “Clients can get up in a day,” says Shawn Fahey, vice president of business development with esalestax.com, of Englewood, Colo. “This is not a major integration.”
E-retailer BlueLight.com, separate yet closely aligned with Kmart Corp., operates a proprietary system to collect taxes where it has nexus. “System-wise, we can turn a state on or off at any point,” says Alex McNealey, Bluelight.com director of operations. “That is something we have internally; there’s a level of programming involved, but it’s very small. It is not costly or labor-intensive to turn a state on or off.” BlueLight won’t say what the cost of its system is or how often it updates it.
Circuit City uses proprietary software to calculate sales tax on all online purchases, something it has done since 1999. The company won’t say how much it costs to collect and remit the tax.
“Those who see the writing on the wall are supportive of
collecting sales tax,” says NRF’s Whittaker. “A lot of Internet retailers believe
they are not getting a competitive advantage by not collecting a sales tax.
This is because consumers shop online for convenience.” How legible that writing
on the wall is will have a lot to do with what happens on Capitol Hill this
year.
