8/01/12
Online sales tax collection seems likely, but how it's implemented will make a difference.
Paul Demery , Chief Technology Editor
Steps from his office on Salt Lake City's eastern fringe, Jonathan Johnson can steal away from the hustle and bustle of running Overstock.com Inc. and head for the clear air and open views of higher elevations of 12,000-foot peaks.
But of late the web-only retailer's president has been contemplating lofty numbers of a different and decidedly more stressful kind. These numbers stem from proposals to require Overstock and other web-only retailers to collect state sales tax. That would mean raising the final price to the shopper 6% to 9% depending on the state's tax rate. Just as troubling, Johnson says, it could cost e-retailers more than $1 million per state to set up and test software for collecting sales tax on orders placed by customers in dozens of states.
The view is quite different for Seattle-based Amazon.com Inc., Overstock's—and practically every other retailer's—biggest competitor. Amazon has dropped its long-standing opposition to an online sales tax and now supports proposals to require web-only retailers to collect sales tax in the 45 states plus the District of Columbia that have a sales tax on their books, regardless of whether the retailer has a physical presence in those states.
Amazon switched sides as it began establishing a physical presence in more states—in the form of dozens of distribution centers it has built so that it can quickly fulfill orders across the country (see chart on page 36). In effect, Amazon is similar to big retail chains, with little choice but to collect sales tax under existing law. Now it stands with organizations that represent retail chains, notably the National Retail Federation, in arguing for "a level playing field" in which all web purchases are subject to sales tax.
Amazon's change of heart also reflects the growing pressure from state governments whose revenue flow has not recovered from the recession and housing crisis, and who increasingly look to online sales tax as a lucrative source of new funds. The University of Tennessee, Knoxville, estimates states would take in an additional $23 billion this year if they could tax Internet and catalog sales, although other estimates are lower.
Increasingly the question is not if online sales will be taxed, but when—and most importantly, how. The details will be decisive for many retailers. Some proposals would exempt e-retailers with out-of-state sales under $1 million, meaning many thousands of web merchants would continue to operate as they do today. Other proposals from retailer advocates would provide significant compensation to e-retailers for the cost of collecting sales tax in about 10,000 state and local jurisdictions. All of this is up for grabs in the halls of Congress, with a decision possibly only months away.
Amazon's strategy
Amazon isn't waiting. As it's built about 40 distribution centers across the country, it's carefully negotiated deals related to sales tax collection. It used to be that states like Indiana and Texas would exempt Amazon from having to collect sales tax in exchange for the new jobs that Amazon's warehouse brought, notes Scott Peterson, executive director of the governing board of the Streamlined Sales Tax Project, a multi-state initiative to simplify tax collection across member states. Also known as the SST, it has 24 member states so far. But after other tax-collecting retailers, including major retail chains, started lobbying states to negotiate tougher terms with Amazon, Peterson says, Indiana and other states started negotiating contracts with Amazon under which the retailer agreed to begin collecting sales tax at a future date, typically within a year or two. Amazon now collects sales tax in six states and will collect in at least seven more by 2014.
That lessens the threat to Amazon that its business will be damaged by having to collect sales tax on orders from consumers in all states with sales tax. Amazon and other web-only retailers have benefited from a 1992 U.S. Supreme Court ruling that exempted retailers from sales tax collection if they don't have physical facilities, such as stores or distribution centers, in the state of the consumer making the purchase.
The looming tax law
But many experts say that Congress is ready to enact a law that would override that decision. Although few expect Congress to pass what many voters would consider a new tax before the November election, "everyone has their eyes on the lame-duck session" that follows, says Maureen Riehl, vice president of government affairs at the Council on State Taxation, an industry group representing major retailers including Wal-Mart Stores Inc., Sears Holdings Corp. and Amazon. That session ends Jan. 3, 2013. "If not this year," Riehl adds, "we fully expect it within the next Congress."
Among several pending federal bills, the Marketplace Fairness Act, introduced in the Senate with bipartisan support from Dick Durbin (D-Ill.), Mike Enzi (R-Wyo.) and Lamar Alexander (R-Tenn.), is said to have the best chance of becoming law. Many states favor it because they could collect online sales tax without joining the SST.
And, with online sales tax laws on the books in 18 states and pending in 10 more (see map), Amazon has thrown its weight behind the measure. "Amazon strongly supports enactment of the Enzi-Durbin-Alexander bill and will work with Congress, retailers and the states to get this bipartisan legislation passed," says Paul Misener, Amazon's vice president of global public policy.
One big issue is which retailers would have to collect sales tax. The Senate bill says it would only apply to retailers with out-of-state—online, phone or direct mail—sales of more than $500,000; the House is expected to support a threshold of $1 million. Amazon has proposed a threshold of $150,000. Close to a thousand or more retailers would be affected by that decision: Although the Marketplace Fairness Act doesn't estimate the number of retailers the bill would affect, the smallest retailer by web sales among the top 1000 ranked by Internet Retailer did $184,000 in total online sales last year. 990 had total web sales of $500,000 or more; and 980 had at least $1 million.
For Amazon, the priority has become building a network of distribution centers that lets it fulfill online orders quickly and provide a high level of service to the thousands of client retailers that use the Fulfillment by Amazon service, which warehouses and ships goods on retailers' behalf. In 10 metropolitan areas, including Boston, New York, Chicago, Phoenix and Seattle, Amazon now offers same-day delivery for some orders.
Other e-retailers, meanwhile, are turning their focus to pushing for attractive terms in any new tax system.
NetChoice, an advocacy group whose members include eBay Inc. and IAC/InteractiveCorp, the parent of Shoebuy.com, contends, along with Overstock's Johnson and others opposed to online sales tax, that federal law and any new system it backs should protect web-only merchants from the costs and legal complications of sales tax collection. Steve DelBianco, executive director of NetChoice, argues that because small retailers don't have the resources to manage tax collection or the sales volume to charge tax and still offer competitive prices, any new law should exempt them if they do $5 million a year or less in sales outside of their home state.
Overstock's Johnson backs DelBianco's contention that collecting sales tax is a huge cost, even for a big retailer like Overstock, which posted more than $1 billion in web sales last year. An in-house study Overstock conducted recently found that it took more than 20 employees over five months, or 9,412 man hours, to test tax collection software. Although the software's annual license fee was less than $50,000, internal development costs, external consulting fees and other technology costs ran the start-up tab to nearly $1.3 million. "And that's just for one state," Johnson says.
Many small retailers simply lack the resources to handle tax collection, says Corey Tisdale, CEO of home furnishings retailer ShoppersChoice LLC. "Big-box stores already have the accounting infrastructure to deal with such a change, but a small million-dollar retailer probably won't even have a full-time accountant on the payroll outside of the owner, and this person is probably shipping and answering the phone as well."
Johnson contends that merchants should receive at least 5% of collected tax revenue, plus legal immunity from tax collection errors based on faulty tax collection software, and a method of handling at the federal court level legal disputes that may arise between merchants and states. "If Congress wants to solve the sales tax collection issue by forcing remote sellers to collect it, the law should be the least onerous as possible to merchants," he says.
Consumer reaction
If Congress does act, e-retailers will have to deal with the consequences. The biggest question is: Will consumers buy less online if they have to pay sales tax?
The answer is not clear. A 2010 study by e-commerce technology company GSI Commerce, a unit of eBay Inc., found that one of its client retailers took a 12% hit to sales after it started charging sales tax. But a study last year by Forrester Research Inc. and Bizrate Insights found that only 8% of online shoppers say sales tax makes a big difference in whether or not they buy online.
Some say e-commerce is strong enough to withstand what seems to be an inevitable new sales tax system. "I do not believe the primary value driver of e-commerce is sales tax avoidance," Tisdale says. "So I think the initial sales dip will be pop-cultural and temporary, and as the news becomes old, people will go back to shopping online for reasons of convenience, research, selection and so on."
Until that time comes for sure, Tisdale and colleagues like Johnson won't be heading to the quiet hills to escape the sales tax juggernaut any time soon.
