September 4, 2013, 3:58 PM

What e-retailers need to know about the online sales tax

Web retailers that have never collected sales tax outside their home states face the very real prospect of a whole new way of doing business online.

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Web retailers that have never collected sales tax outside their home states face the very real prospect of a whole new way of doing business online.

Shedding light on how to succeed in e-commerce comes naturally to Corey Frons, who launched his own e-commerce site more than a decade ago and over the years has managed several sites selling jewelry, consumer electronics, and health and beauty products. And as CEO of eBulb Inc. since the fall of 2011, he has steered web-only as its sales have surged from less than $5 million in 2010 to nearly $13 million in 2012. That puts the retailer at No. 604 among the top 1,000 e-retailers ranked by Internet Retailer. The web, Frons says, never ceases to amaze. "It's great to see people willing to order something as simple as lighting online," he says. "The fact that we could grow so much in 2011 and 2012 is huge."

Frons has used his broad web retailing expertise to perfect BulbAmerica's operations and how it serves customers. From building a base of some 35,000 types of unique bulbs on a highly customized web site running on eBay Inc.'s Magento software, to perfecting the retailer's packaging materials and shipping processes, BulbAmerica has strived to keep its customers happy while running a tight ship. "It's all a balancing act, operating on a tightrope," he says confidently.

But one thing that troubles him is the prospect of having to collect sales tax across nearly the entire country. Like many online merchants, BulbAmerica now collects sales tax in only one or a few states. That's all BulbAmerica and other web-only retailers are required to do by existing law, which leaves them free from collecting sales tax in most of the 45 states, plus the District of Columbia, where sales tax is charged. Current federal law exempts retailers from collecting tax in states where they have no physical presence, or nexus in legal terms, such as stores and distribution centers.

That could well change in the next year or so. A bill that the U.S. Senate has already approved, the Marketplace Fairness Act, would authorize those 45 states and the District of Columbia to force more online retailers to collect sales tax, whether or not they have nexus. That has Frons and many other web merchants worried. "It's a new headache I'd rather not have," Frons says.

And what a headache, he and other web retailers say. Being forced to collect tax, they contend, will remove what has been one of their key advantages over retail chains—the ability to promote tax-free products—while the process of collecting sales tax for more than 10,000 taxing jurisdictions and remitting it to states will greatly add to their operating costs. And with tax collection duties come possible audits by state revenue departments, another time-consuming process that retailers fear could lead to fines if they make a mistake calculating and remitting tax.

"Unlike Wal-Mart, and other big retailers, we do not have armies of accountants and tax attorneys to deal with costly and time-consuming audits from every state," says Ben Kirshner, CEO of Coffee Serv Inc., which operates, No. 495 in the Internet Retailer 2013 Top 500 Guide with $19 million in 2012 web sales. A tax expert with connections to state revenue departments and the major retailers' tax departments says privately that while major retailers tend to have large tax and accounting staffs, they usually have only a few people dedicated to sales tax matters.

Kirshner and other retailers say they're no strangers to costly tax audits, and that makes the idea of possibly having to contend with even more of them mind-boggling. "In our state we have experienced audits that took us many days to deal with and cost us thousands of dollars in accounting and bookkeeping time," Kirshner says. Adds Kevin Hickey, CEO of Online Stores Inc.: "A state tax auditor was on site for four weeks and took up hundreds of hours of accounting and I.T. time, running reports and printing thousands of invoices. We had to jump through hoops, document everything—it was a nightmare."

The biggest unknown for e-retailers at this stage, however, may be to what degree charging sales tax will scare away online customers unaccustomed to seeing it at checkout. Many online retailers play up the message "No Sales Tax" or something similar on their home pages and product pages, but that will have to come to an abrupt end for many of these retailers if the Marketplace Fairness bill becomes law. The bill passed the Senate in May by a vote of 69 to 27 and is now in the House. The Senate version exempts retailers with less than $1 million in sales across all states where they have no physical presence.

"When an online shopper is putting in a credit card number, she wants to see trust logos, shipping information, etcetera," Frons says. "If all of a sudden, instead of seeing a total price of $100 and free shipping, she now sees an $8 tax added on, she's likely to think twice about it. I think the bounce rate in checkout pages will rise. It will be bad for e-commerce." Statewide sales tax rates, including local rates, ranged from 4.35% in Hawaii to 9.44% in Tennessee as of January 1, for a nationwide average of 7.0%, according to the Tax Foundation, an independent research organization.

The actual impact of collecting tax on online sales, however, is difficult to determine. A 2011 study of more than 34,000 online consumers by Forrester Research Inc. and Bizrate Insights found that only 8% of online shoppers say sales tax by itself makes a big difference in whether they buy online. But an April survey of 3,196 online consumers by comScore Inc. found that 54% said they'd be "less likely" to buy online with sales tax, while 42% said sales tax would have no effect on their online shopping.

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