Two-year-old MTailor has garnered millions in sales for its custom-made shirts, all via its app.
Some experts credit the lack of sales tax for the Web’s boom in holiday shopping. So how long can it last? At least two more years, says Rich Prem, a partner in the e-commerce tax area at Deloitte & Touche. Thanks to the coming presidential election, he sees no movement this year.
“Given that the economy is good and the sales numbers are still relatively small,” Prem explains, “I’m not quite sure this issue is ripe to be resolved.”
Congress also awaits a recommendation on the issue from its Advisory Commission on Electronic Commerce, and the group remains deeply divided. The commission, which includes government officials and technology executives, is scheduled to meet next month in Dallas.
Even as the commission toils and presidential candidates debate the matter, says Prem, the legal basis for charging sales tax on Internet purchases already exists. According to a 1930s law, a seller’s failure to collect sales tax doesn’t change the consumer’s liability. “Just because the merchant doesn’t collect a sales tax doesn’t mean you are off the hook,” Prem says. “The problem is that the law would be very costly and intrusive to enforce.”
But today’s debates over the issue are only postponing the inevitable, says Prem. “E-commerce will grow, and there will be more pressure to level the playing field, along with a move to simplify the existing sales tax system.”
That’s because sales taxes vary not only from state to state but from city to city and county to county. “There needs to be some radical simplification,” Prem says. In Indiana, for example, someone buying five doughnuts is charged sales tax, while a customer who buys a half dozen is not.
Other tax issues also affect e-commerce. A U.S. Supreme Court ruling requires retailers with physical locations such as stores, warehouses and offices to assess sales taxes in those states. That’s why Amazon.com charges a sales tax to residents of Washington. Barnes & Noble, KB Toys, Borders and others have set up Web operations as separate entities and charge no sales tax. But what they give their customers in sales tax savings, they take away in customer convenience: Shoppers who order goods from their sites cannot return purchases to physical stores.