October 4, 2016, 2:53 PM

A sales tax solution?

Pressure builds on Congress to enact a federal online sales tax law, and a new proposal might satisfy all sides in this contentious debate.

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The long-simmering online sales tax issue may finally be reaching a boil. State governments are applying pressure on Congress to enact a law that would require online retailers to collect sales tax on most transactions, something many web-only and catalog retailers don’t do today. And if Congress doesn’t act, several states have passed laws that directly challenge the U.S. Supreme Court decision that has exempted many e-retailers from collecting sales tax, which could lead the high court to reviewing its 1992 decision within the next year or two.

Congress has for several years considered proposals for a national online sales tax policy, but those bills have been blocked by conservative House Republicans that oppose anything that looks like a new tax. Proponents argue that it’s not a new tax, as consumers today are required to remit to their own state governments the sales tax on purchases made from online retailers that don’t collect the tax, but few do.

A national online sales tax law generally has been favored by retail chains that must collect sales tax online in states where they operate physical stores, and opposed by many online retailers that benefit from the lower total price they charge by not adding sales tax. But a draft bill being circulated by the influential House Judiciary Committee chairman, Republican Rep. Bob Goodlatte of Virginia, has gained support from both sides, potentially paving the way for congressional action.

“This legislation, as currently drafted, is clear, fair and simple,” stated a letter supporting the Goodlatte bill signed by more than 100 online retailers, catalogers and retail trade associations.

If Congress should enact a national online sales tax bill, or the Supreme Court reverse its earlier ruling, online and catalog retailers will have to adjust to a new reality in which they add sales tax on most purchases. Recent studies suggest that more consumers are accustomed to paying sales tax on web orders and won’t stop shopping online, although the impact of an online sales tax appears to increase along with the purchase price.

The views of both consumers and legislators on the online tax question have changed over the past decade thanks in part to shifts in the strategy of the largest online retailer, Amazon.com Inc. A decade ago, many legislators backing state and national online sales tax bills called them “Amazon tax” proposals, and Amazon took much of the heat from lawmakers who said e-retailers were depriving states of needed revenue.

That changed when Amazon began building distribution centers all over the country so that it could meet its promise of delivering orders free within two days to the steadily growing number of shoppers joining its $99-a-year Amazon Prime program, which currently has 63 million U.S. households participating, according to Consumer Intelligence Research Partners LLC, an equities research firm. When Amazon builds a fulfillment center that gives it a physical presence in that state, and any retailer with a physical presence in that state can be required to collect and remit sales tax from consumers who reside there, under the terms of the 1992 U.S. Supreme Court decision in a case called Quill Corp. v. North Dakota. That decision constitutes the prevailing law regarding collection of sales tax by out-of-state sellers, whether they sell by the web, telephone or mail order.

As recently as four years ago Amazon collected sales tax in only six states. But now it collects tax in 28 states that represent nearly 84% of the U.S. population. Amazon, meanwhile, shifted its position to favor a national law requiring collection of sales tax on online purchases. Those developments took Amazon out of the center of this debate.

What’s more, collecting sales tax has had little impact on Amazon’s sales, according to Slice Intelligence, which collects data from the email receipts received by some 4 million U.S. consumers (see story below). That may be in part because so many Amazon shoppers belong to the retailer’s Prime loyalty program and consider paying sales tax a small price to pay for the free, fast shipping they enjoy.

While not on the scale of Amazon, other web-only retailers have also built out their distribution networks. For example, Newegg Inc. operates distribution centers in three states outside of its home state of California and Wayfair Inc. in two states besides its home base of Massachusetts, according to Internet Retailer’s Top500Guide.com. Those facilities force those e-retailers to collect sales tax in those states. Some web-only retailers, such as Bonobos Inc. and Warby Parker, have opened physical stores, which also trigger the tax-collection requirement.

Web-only retailers’ growing physical base has altered consumer views of paying online sales tax, says Hayley Silver, vice president of Bizrate Insights. “As the largest online retailers, such as Amazon, expand their distribution networks such that more and more online purchases become eligible for sales tax—in addition to evolving sales tax laws—most consumers are accepting the reality and considering additional factors as they choose where to shop,” Silver says.

That shows up in data Bizrate Insights collected in surveys of online shoppers this summer. Only 29% of shoppers surveyed Aug. 1-4 called sales tax an important factor in their purchase decision, versus 37% when Bizrate Insights asked the same question in both 2013 and 2011.

Nonetheless, the Bizrate Insights data shows there remain a significant number of online shoppers who avoid e-retailers that collect sales tax. Among the consumers who did not pay sales tax on their most recent purchase, 48% said sales tax was an important consideration, versus 24% of those who paid sales tax. Bizrate Insights surveyed 6,216 online buyers immediately after they had made a purchase this month on the websites of some 4,500 online retailers in the United States and Canada.

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