Frederick Reese for MinutePressNews writes: For many customers, one of the true benefits in online shopping is the lack of sales tax. Under a 1992 Supreme Court decision, retailers cannot collect sales tax from an out-of-state customer unless the retailer had a physical facility in the customer’s state. Most states, like New York, ask their residents to track online purchases and pay their sales tax as a “Use Tax” on their end-of-year income tax filing. Few taxpayers actually did this.
This sense of “unfair play” has rattled brick and mortar stores, who feel that the online stores’ growing share of the retail market is responsible for shrinking sales. From 2012 to 2013, online sales grew 13 percent, from $231 billion to $262 billion, while the retail market as a whole grew just under three percent. While online sales only constitute eight percent of all retail sales in the U.S., as of 2012, recent developments — such as Blockbuster Video being driven out of business by competition from Netflix and Borders’ Books shutting their doors after a losing market fight with Amazon.com, which is now endangering Barnes & Noble — have made physical retailers jumpy. The states are looking for a way to collect the sales tax they feel is due them in an attempt to help balance their budgets.
“This collection disparity has tilted the competitive landscape against local stores, creating a crisis for brick-and-mortar retailers around the country and in your state,” said David French, senior vice president of the National Retail Federation.
To remedy this, the House Judiciary Committee has issued “principles” for guiding conversations toward establishing new legislation. “Americans across the country are affected by the issue of Internet sales tax whether they are consumers or business owners,” wrote House Judiciary Committee Chair Bob Goodlatte (R-Va.) “The aim of the principles is to provide a starting point for discussion in the House of Representatives. I greatly look forward to hearing fresh approaches to this issue and continuing the discussion.”
Defining “principles”
Among the “principles” listed are the idea that only taxes that exist in the offline world should be imposed online, that the notion that a retailer is online or offline should bear no difference on the sales tax burden, that customers can challenge discriminatory taxation practices, that executing sales tax compliance requirements should bear no excessive burden on businesses, that tax rates should be competitive, that the federal government should not be able to intervene on a state’s right to impose an independent sales tax system and that customer data must be protected.
“The principles are a good step forward and we will continue to walk with the chairman on this journey. However, we shouldn’t lose sight of the fact that certain sellers are continuing to suffer from as much as a 10 percent price disadvantage and they are looking for relief sooner rather than later,” said Jennifer Platt, vice president for federal operations at the International Council of Shopping Centers.
This is Congress’s second attempt at an internet sales tax. In May, the Senate passed the Marketplace Fairness Act, which would make all items sold online taxable in the state they were shipped from. The bill, despite bi-partisan support in the Senate, died in the House — in part due to the exemption offered to online retailers to not collect sales tax in states that have sales of less than $1 million. Major retailers, such as eBay, considered this unfair and actively lobbied for the exemption limit to be lifted to $10 million.
The exemption was included to remedy the primary reason many retailers do not favor collecting online sale tax: every state has an unique tax code with requirements and obligations that must be met. Preparing 46 separate tax reports in 46 different ways is typically beyond the capability of the small vendor. Under the Marketplace Fairness Act, it is the states’ obligation to provide the companies with free software for the tax calculation and a single state entity that the retailers would have to communicate with.
“Whether you’re a consumer who loves the selection and value that small businesses provide online, or a small-business seller who relies on the Internet for your livelihood, Internet sales tax legislation affects you,” eBay wrote on its public plea to its customers to petition Congress. “For consumers, it means more money out of your pocket when you buy online from your favorite small business. For small-business sellers, it means you would be required to collect sales taxes nationwide from the more than 9,600 tax jurisdictions across the US. You also would face the prospect of being audited by out of state tax collectors. That’s just wrong, and an unnecessary burden on you.”
eBay’s position — at least, earlier this year — was that the fact that small business were exempt from the sales tax actually protected them from the unfair application of tax laws larger companies can secure. “The current bill [the Marketplace Fairness Act] favors large online and offline retailers,”eBay wrote on its Main Street blog. “Larger retailers leverage their size to negotiate tax breaks or grants, in addition to the favorable terms they can obtain throughout their supply chains. Unless the bill is amended to include a real small business exemption, it would actually damage the competitiveness of innovative small businesses. eBay believes those very businesses should be empowered to use online tools so they can reach new customers and grow their business.”
A lost need to protect small businesses
Goodlatte’s “principles” remove the impetus on the states to accommodate the multi-state tax regulations. While the “principles” called for simplicity, it also ensured the states’ rights to collect taxes freely. Without any specific protections to accommodate small online businesses, it can be argued that this set of “principles” serve larger retailers such as Wal-Mart, Target and Amazon.com — who all already collect sales tax online due to their physical presence in multiple states — at the expense of the independent retailer.
“We’ve been on the record for years that we believe the small seller exemption is a relic from when the software was extremely expensive,” said FedTax Chief Executive Officer David Campbell, whose company provides business owners free tax compliance software by charging a commission to states on tax it collects. “We’ll support whatever exception Congress thinks is O.K., but we vehemently disagree that compliance has to be complex or expensive.”
With Goodlatte removing small business protection from his online sales tax “principles,” eBay is now onboard. The company “is very encouraged that the remote sales tax principles released today by Chairman Goodlatte address concerns that we have raised on behalf of our small business community,” said Brian Bieron, a public policy executive for the company, in a statement.
The states are expecting legislation to pass by December. While 50 percent of all online shoppers shop without consideration of the sales tax, 30 percent said having to pay sales tax would return them to offline shopping. With online shopping being one of the few sectors in the economy showing real growth, it is questionable why one would be tempted to alter it simply to make the big box stores happy.
Ultimately, the answer to this lies in whether one feels the economy can be rebuilt and healed by the wealthy or from the energy and effort of the nation’s small businesses.
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