Addressing the E-tail Sales Tax Dilemma

Small online retailers are under threat by a Congressional initiative that would force them to collect sales taxes for their customers’ home states. “If that happens,” writes Phil Bond, executive director of WE R HERE, “a small online retailer operating from a longtime street-front location, a modest warehouse space or even the owner’s kitchen table will have to deal with ever-changing sales tax rates for nearly 10,000 state and local tax jurisdictions.”

WE R HERE describes itself as the “unified voice of small business retailers all over America,” ranging from Army Redhead MP, a stay-at-home mom in Williamsburg who trades on eBay, to Jonathan Gonzales, of Gainesville, who does PC repair. The “WE” stands for “web enabled.”

Big retailers are backing the Congressional legislation because they have the scale to cope with the added administrative burden while small retailers — many of them operating out of their homes — would suffocate. Small retailers are suffering eroding market share as it is, Bond writes in a Times-Dispatch op-ed. “From 2008-10, “brick & click” retailers with sales of more than $20 million grew their share of online sales from 33 percent to 38 percent, while the share for smaller Web-enabled retailers with sales less than $20 million saw their share erode from 69 percent to 51 percent.”

On the other hand, state and local governments have legitimate beefs as well. E-commerce is trending steadily higher as a percentage of retail sales, and the inability to collect sales taxes is eroding the tax base of state and local governments. Meanwhile, traditional, bricks-and-mortar retailers can legitimately say that they suffer a competitive disadvantage when their customers have to pay a sales tax but those of their online competitors do not.

Bond proposes a sales tax exemption for small retailers. That’s one approach, and probably a politically popular one because it protects mom and pops. But it raises another question: Why should government favor mom-and-pop online retailers any more than, say, mom-and-pop grocery stores, mom-and-pop farms or, for that matter, mom-and-pop media outlets like blogs?  One could just as easily argue that the government should favor larger, better-funded companies that develop the new technologies, new ways of doing business and other innovations that propel the economy forward. I don’t make that argument, I’m just saying that anyone can make an argument to justify favoritism for whomever he wants.

Bacon’s bottom line: A just and efficient tax regime creates a level playing field for all businesses. Winners and losers in the marketplace should be determined by their cost efficiency and appeal to customers — not their ability to persuade politicians to exempt them from taxes that their competitors have to pay. Mom-and-pop e-tailers would do better to seek marketplace solutions to the administrative burden of a tax on online sales than lobbying for exemptions.

Just as technology created the Internet tax dilemma, technology may be able to solve it. At the birth of the online revolution, only a handful of companies could afford to build the back-end ordering and billing machinery for online enterprises. Now that capability is a commodity than anyone can purchase for a nominal monthly fee. If online retailers were required to collect sales tax for the 50 states, it wouldn’t be long before the vendors of e-tailing software added modules that tabulated those liabilities automatically and deposited the funds electronically.


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6 responses to “Addressing the E-tail Sales Tax Dilemma”

  1. ” Why should government favor mom-and-pop online retailers any more than, say, mom-and-pop grocery stores, mom-and-pop farms or, for that matter, mom-and-pop media outlets like blogs? ”

    that’s an EXCELLENT question ! I wonder what small businessman DJ might say?

  2. Thank you for your thoughtful analysis of the online sales tax collection issue. I couldn’t agree more with your conclusion. You are correct, technology is readily available to help retailers of any size manage sales tax collection, reporting, and remittance. Our company even offers such a service at no cost. As you also correctly suggested, many e-tailing software vendors have already embedded access to our service within their platforms.

  3. Why should government have the power take money from one person and give it directly to another person? Why should a government force a business to collect taxes? Business doesn’t pay taxes, they pass the cost along in price increases to the consumer. Start cutting the redistribution of wealth before you try to raise taxes.

  4. ” Why should government favor mom-and-pop online retailers any more than, say, mom-and-pop grocery stores, mom-and-pop farms or, for that matter, mom-and-pop media outlets like blogs? ”

    Easy answer, there are no winners/losers in the argument. All buyers who purchase online owe Sales/Use Tax. In most States, it’s a line item on your tax form. States are to blame for not informing the public that such law exists, nor bothering to enforce same. They are also to blame for making tax code so complicated. For example, is Cotton Candy food, entertainment, or sugar? Depending where you live, you may be tax for one, none, or all three; and just why should online located 10 States away be force to know local law? Lawmakers wrote these laws thinking of only their own back yard. They never considered online sales while proposing it. A local B&M only deals with one tax code, one tax rate, and one tax form. It is unreasonable to expect online to file 45 or more returns, know of 10000 tax districts (not defined by zip code), nor the rules of tax exemptions/additions, like in PA where baby bottles are taxed, but the bottle nipples are not. Many States charge tax on shipping, others do not.
    Even for in-state sales, where online must collect tax due to physical nexus, it is a huge burden trying to figure out local tax law, esp. when State DORs offer no software to do so.

    While I favor online Sales Tax, the rules/laws Congress offers is inadequate at best. Exemptions offered are too low, but at the same time, will trigger needless audits from whistle blowers and competitor button pushers. Proponents claim modern technology as the answer, and there are third party software companies that offer one click solutions, but it comes at a cost for as much as $3500 or more + a transaction fee. Consider also that for plastic payments, the merchant account collects fees on tax collected …. $$ that does not belong to you or the CC processor, it belongs to the State DOR!

    My solution offers a win-win for all. Have the CC processors collect/remit the tax directly to the States (States pay related fees). It would be the lowest cost per transaction, States get instant funds, paperless for retail, and the system would work for B&Ms as well as Online. This is the proposal that should be submitted to Congress, not the complicated web of law they are weaving now.

  5. If the states and local governments want an online sales tax, they need to give up some sovereignty. There needs to be considerable uniformity among sales tax laws. It is unjust and unreasonable to expect any business, most especially small ones, to work with thousands of tax applications.

  6. There also remains the issue of minimum contacts for any state to require a business operating in another state to collect, withhold and remit the second state’s sales tax. So far, the courts have rejected the idea taking and fulfilling an order via interstate commerce is sufficient. Do we really want to expose businesses in other states to Virginia’s laws and regulations? And vice versa? You cannot sell in California unless you have union workers. You cannot sell in Virginia unless you operate in a right-to-work state. I don’t think so.

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