June 3, 2013, 2:59 PM

A new model

Eliyahu Federman senior vice president of 1SaleADay.com, takes the contrarian view that an online sales tax will ultimately benefit e-commerce.

Internet Retailer

Competition is the essence of commerce. The only way businesses get stronger is if there is competition to do things better, faster or at lower cost. All that businesses can—or should—ask for is for the rules of competition to be fair to all parties.

The current debate over the collection of sales tax for online purchases is a perfect example of fairness in competition. Current U.S. law dictates that retailers only collect and remit sales tax in states where they have a physical presence. The proposed Marketplace Fairness Act making its way through Congress would give states the power to require all e-retailers, regardless of whether they have a physical presence, to collect and remit sales tax for Internet purchases. This would apply to the 45 states and federal districts that have a state sales tax. The U.S. Senate passed the legislation by a vote of 69-27 in May. It remains pending in the U.S. House of Representatives.

The measure is strongly opposed by some e-commerce companies, including Overstock.com Inc. and eBay Inc. I work for the daily-deal web site 1SaleADay.com. We generated $157 million in web sales in 2012. We remitted about $800,000 in sales tax to the state of Florida for purchases made by Floridians, as required by law, because that is where we reside. If the Marketplace Fairness Act passes, we will have to collect and remit taxes to thousands of state and local taxing authorities, including the 45 states that charge sales tax. Even though some of the cost will be offset by the legislation's requirement that the states pay for tax-calculating software, setting up the software and manpower to ensure compliance will still cost at least thousands of dollars.

Despite this, I and 1SaleADay.com do not oppose the legislation. Here's why. Imposing an online sales tax will help not only our own business model but also, over the long haul, force improvements for all e-retailers' business models. It will make retailers rethink their pricing and inventory strategies, for example, and will force them to be better competitors. That's a win for retailers and for consumers.

If a TomTom GPS unit costs $92 at a Wal-Mart store or Walmart.com, it might be listed for about the same price on web-only Newegg.com. When you factor in the average 8.629% sales tax Wal-Mart Stores Inc. is required to collect today in 45 states but Newegg collects only in three, it pushes the Wal-Mart customer's total to nearly $100 while most Newegg customers' total stays at $92. Faced with this difference, many will select Newegg over Wal-Mart. But make Newegg also collect the tax in all states that have sales tax and the price evens out, forcing Newegg to find other ways to capture sales besides relying on the sales tax advantage.

Discount daily-deal web sites like ours are working every day to capture sales by providing consumers with more value than they can find elsewhere. For example, we might be able to sell the same GPS for $39 because our business model is to have a narrow product selection, but a lot of it. That lets us take advantage of volume pricing and sell for significantly less than other retailers, even when the consumer pays that extra 8.629%. Prices at conventional online retailers will be comparable to bricks-and-mortar prices—but the pricing advantages of discounted deals will still be significantly more competitive than those. I suspect that knowing they will have to pay the tax regardless of where they shop will compel comparison shoppers to seek out even better deals online. That gives retailers like 1SaleADay an advantage over e-retailers like Amazon.com Inc. because daily-deal prices will consistently beat conventional online and bricks-and-mortar pricing, even if we have to collect sales tax.

For us, selling fewer products in greater volumes is our key competitive advantage. The more quantity we buy, the better deal we get from our suppliers and the cheaper we can sell the products to consumers.

Other kinds of e-retailers will find different competitive formulas. Newegg and Overstock, for example, sells thousands of product SKUs, which does not allow for high-volume purchasing on everything they sell. Although they drive more overall sales when compared to daily-deal web sites, they sell fewer units of individual products, which is why their price points can't match the daily-deal model. These e-retailers will adapt by providing quicker shipping times, free return shipping and other conveniences that will satisfy customer needs and potentially give them a competitive advantage in the long run.

The point is, yes, the burden of implementing tax-calculating software will initially be painstaking and costly for online companies. But in the long run, e-retailers of all stripes will, by the nature of business, find new ways to compete. Daily-deal sites like ours have a formula that allows us to effectively compete with the megasites like Amazon, eBay and others. If we can take on these well-known names and succeed, surely all e-retailers can find ways to remain competitive—even in an era when sales tax collection becomes mandatory.

Legislative update

With the U.S. Senate's passage last month of long-awaited sales tax legislation, the effort to broadly expand the number of retailers subject to tax collection responsibility has proceeded further than ever before. President Barack Obama has come out in favor of the bill, but its fate in the House of Representatives is uncertain. Several high-ranking Republicans, including Speaker of the House John Boehner, have said they will probably not support the bill because states have not done enough to simplify tax collection.

If the measure, entitled the Marketplace Fairness Act, passes the House and is signed into law, it could bring a significant change to the way many online merchants operate.

That's because there are 388 web retailers ranked in the Internet Retailer 2013 Top 500 Guide who don't already collect sales tax in all of the 45 states with a sales tax law. The remaining 112 do collect in all of the 45 states with a sales tax law.

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