Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
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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.
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.