California’s latest twist in sales tax battle will hurt local retailers in favor of a certain online auction site

August 27, 2011
Los Angeles Times

Los Angeles Times: New online sales tax legislation

According to a Los Angeles Times article, the next move in the battle over California’s online sales tax collection law comes from supporters:

A coalition of giant, brick-and-mortar retailers and their legislative allies have come up with a new strategy to try to head off Amazon.com’s referendum to overturn the state’s new Internet sales tax law.

On Thursday, lawmakers amended a bill in the Senate Appropriations Committee and sent it to the full Senate for a vote next week. If the bill gains approval from the Senate, the state Assembly and the governor, its passage would have the effect of nullifying Amazon’s current drive to qualify a referendum for the June 2012 budget.

To recap the situation thus far: A law requiring online retailers with California affiliates to collect sales tax went into effect on July 1. Amazon immediately dropped its affiliates in California, and on July 8 the company filed a petition to put a referendum to repeal the law on the ballot, for California voters to decide on. The petition was approved, and since then Amazon has been campaigning to collect the 505,000 signatures needed to put the referendum on the ballot.

And  now it seems that supporters of California’s legislation have made the latest move. According to the LA Times, “Passage of a new law would supersede the old law, making the referendum invalid.”

Apparently the new bill raises the small seller exception—where the previous law exempted online retailers with less than $500,000 in annual remote sales from collecting sales tax, the new one raises that threshold to $1 million. That change was enough to get a certain online auction company to drop its opposition to the law, so legislators are more optimistic about its chances.

Believe it our not, this latest escalation of the small seller exception is as dramatic as it is surprising. The economic impact of this change will be significant, however the lawmakers in Sacramento seem to have glossed over that fact:

…add an urgency clause, and increase the small business exemption from $500,000 to $1 million. Staff notes that BOE does not track micro-level data on affiliates that may be subject to the exemption, so the fiscal impact related to increasing the threshold in indeterminable. (emphasis added)

Are they serious? They think it’s indeterminable? Affiliates have nothing to do with the revenue collection, it’s the retailers that collect, not the affiliates. This statement is pure misdirection. I expect Ms. Betty Yee and quite a few analysts at the Board of Equalization would dispute that they could not calculate the loss of revenue, and the legislature should immediately review some of their recent findings on the subject (like this and this).

This amendment blatantly discriminates against small local main street retailers who are not afforded any such exception—proper tax policy should treat all retailers and taxpayers equally. Surely there are a few local retailers who would love to not have to collect the sales tax on their first $1 million in sales. For a bit of perspective on this matter, let’s listen to Amazon’s own Mr. Paul Misener in his testimony before the United States House of Representatives in 2006

To be sure, no one expects truly small businesses to do the work of sales tax collection alone but that doesn’t mean they shouldn’t be required to do it at all. By analogy we require small business persons to sign their legal documents in ink but we don’t expect them to make their own ballpoint pens.

Amazon.com will offer sales tax collection services to our small seller customers. I am sure that our on-line competitors also can and will. Of course, this discussion so far as been limited to small businesses conducting interstate sales. What about small main street businesses selling locally? Even after a decade of e-commerce, as Brian [Bieron of eBay] has pointed out, still over 90 percent of retail sales are off line.

Small main street businesses already collect sales tax and, thus, have both the administrative burden of tax collection and the higher prices caused by it. If out of state small businesses would not have to collect, then their main street brethren would be saddled with a competitive disadvantage both as to burden and price. Hopefully policy makers never would conclude that this disparity would be fair to main street small businesses. (emphasis added)

We couldn’t agree more.

We continue to believe that all this contentiousness is unnecessary. Energy would be better spent on federal legislation on online sales tax collection—which Amazon and lawmakers support. It solves many other problems, too. To quote from ourselves:

As states such as California and Illinois enact affiliate nexus legislation (so-called Amazon tax laws) to attempt to collect sales tax due on online purchases, small businesses across the country are being caught in the crossfire. Affiliate marketers are forced to either find entirely new sources of revenue or flee to another state. Meanwhile, online retailers that rely on affiliate marketing are forced to either eliminate their established sales and marketing teams or come into compliance with the new laws.

The better solution is the anticipated Main Street Fairness Act, which incorporates the Streamlined Sales and Use Tax Agreement (SSUTA). SSUTA streamlines and simplifies state sales tax regulations, making it easy for retailers to collect sales tax for multiple states. SSUTA is the cooperative effort of 44 states (including California and Illinois), businesses, political leaders, and industry associations. States that adopt SSUTA have committed to make sales tax collection easier for all retailers, online and offline, large and small.

We hope that the Main Street Fairness Act will soon make these state battles moot. It’s the best solution for all.

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Senator Bob Corker (R-TN) voices support for online sales tax collection

August 26, 2011

According to an article in the Nashville Business Journal, Senator Bob Corker (R-TN) has voiced support for the online collection of sales tax:

U.S. Sen. Bob Corker signaled Wednesday that he’d support a federal policy to make online retailers collect sales taxes, calling it “patently unfair” that companies like Amazon.com don’t have to while brick-and-mortar businesses do. . . .

Corker on Wednesday stopped short of outright saying he was ready to support a proposal to force the collection of sales tax by online retailers nationally. He said he’s studying a legislative proposal by Sen. Dick Durbin, D-Ill., that is still changing, and Corker noted that consumers already are supposed to contribute sales taxes for online purchases but typically don’t.

In a recent blog post, we talked about the (false) perception that online sales tax collection is a partisan issue—in fact, we’re seeing more Republican politicians speak out in favor of online sales tax collection every day. Which isn’t surprising at all. The online collection of sales tax is a bipartisan issue of tax fairness; it doesn’t involve raising taxes or creating a new tax, and it does involve making sure our Main Street retailers are able to compete with online retailers on a level playing field.

We applaud Senator Corker for speaking out in favor of online sales tax collection, and we look forward to seeing more and more Republican lawmakers join him.

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Editorial: Florida (and the country) needs online sales tax collection

August 26, 2011

We were thrilled to see this editorial from the Tallahassee Democrat (reprinted on the News-Press.com website), which makes one of the strongest, most cogent arguments for online sales tax collection that we’ve ever read. We urge you to read the entire editorial, but here’s part of it:

State Rep. Michelle Rehwinkel Vasilinda reminds – or attempts to remind – her tax-resistant colleagues in the Florida Legislature that collecting a sales tax on purchases made online is not the same as raising taxes.

Raising money, yes, but as Rehwinkel Vasilinda put it at the end of last session, “The concept of leaving tax revenue on the table, especially when we really need it, is really irksome.”

Taxes should be collected on purchases from online merchants, the same as purchases in brick-and-mortar shops, which suffer from this not-so-level playing field of commerce. Business groups such as Associated Industries of Florida and the Florida Retail Federation would like to see the disparity addressed.

It’s not just the tax avoidance that’s a problem for local merchants. In many cases local stores end up functioning as a showroom for online shoppers who like to look at the merchandise in person, but buy it online where there’s no sales tax.

But because online sales cross state boundaries and tax rates vary so much nationwide, a meaningful online sales tax would be most effectively and uniformly collected under federal legislation.

This clear-sighted editorial ends with an endorsement of both the Main Street Fairness Act and the Streamlined Sales and Use Tax Agreement (SSUTA). SSUTA was created by forty-four states and the business community to simplify sales tax collection and make it easier for businesses to collect sales tax. The Main Street Fairness Act would allow states that have adopted SSUTA’s guidelines to require all retailers, whether in-state or out-of-state, to collect sales tax on purchases made by state residents.

Last spring, Rehwinkel Vasilinda, D-Tallahassee, sponsored HB 455 to have Florida join the agreement, and Sen. Evelyn Lynn, R-Daytona Beach, sponsored the companion SB 1548. Neither moved forward, though perhaps now, with this umbrella effort in Congress gathering steam, Florida lawmakers will join the 23 states that have joined the coalition.

Roughly 1,400 retailers already collect sales tax in those “streamlined” states on a voluntary basis.

They’ve remitted more than $700 million to their respective states, yet estimates are that the actual amount lost could be as much as $23 billion by 2012.

This legislation is overdue in Congress, and the collection of this tax is critical to Florida, which needs to join the future and work to close this unfair tax loophole here.

To those who have said that online sales tax collection is not a bipartisan issue: Note that the measure to have Florida join SSUTA was introduced in the Florida Senate by a Republican and in the House by a Democrat.

In an article on another Florida website, Matthew Falconer, who is running for mayor of Orange County (FL), also points out that the Main Street Fairness Act is a bipartisan issue and offers a way to combat the false perception that it increases taxes:

Not surprisingly there is support for the bill on a state level by Republicans and Democrats alike. Even Jeb Bush supports some type of internet sales tax. There are complications to the collection procedures but the technology exists to address those problems. The obstacle to the internet sales tax collection problem is political. It is seen as a tax increase which is taboo for Republicans.

The easy solution to that problem, again supported by Jeb Bush, is to reduce taxes by the same amount of the increased revenue from internet sales tax collection. This does not create additional taxes but levels the playing field between brick and mortar stores, the ones that employee our neighbors, and on line retailers (many of which are based in other countries).

Other politicians have also suggested that if sales tax were collected online, other taxes could be eliminated. As we blogged about recently, Indiana State Senator Luke Kenley and West Virginia delegate John Doyle have said that if online retailers collected sales tax for their states, the inheritance tax or the groceries tax (respectively) could be eliminated.

We have long said that online sales tax collection is a bipartisan issue, one that should matter to anyone who cares about fairness and tax equality. We’re glad to see that politicians on both sides of the aisle agree.

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Facts on Main Street Fairness Act and Streamlined Sales Tax, including job figures

August 24, 2011

We recommend our readers take a look at two sources of thorough backgrounds on the Main Street Fairness Act, the Streamlined Sales and Use Tax Agreement, and online sales tax collection in general.

A fact sheet issued by the International Council of Shopping Centers is worth reading in its entirety, but we were particularly interested in some of the statistics it includes, which we hadn’t seen before:

  • One of out every 11 U.S. jobs is shopping center-related; for every 100 individuals directly employed at regional shopping centers, an additional 20 – 30 are supported in the community due to multiplier effects
  • Each $1 million of new retail sales adds 3.61 jobs. To illustrate: 
    • $1 million in new sales at Best Buy’s average e-commerce and B&M shares is expected to create 3.47 jobs;
    • The same $1 million in new sales at Amazon’s average is expected to create 0.88 jobs.

Again, it’s definitely worth reading the entire fact sheet. The simple bulleted arrangement is surprisingly effective, and with each fact, the implicit argument for the Main Street Fairness Act becomes stronger and stronger.

The other piece is an article by Sylvia Dion at allBusiness (we blogged about an earlier article of hers on the Main Street Fairness Act). This time she focuses on the Streamlined Sales and Use Tax Agreement (SSUTA) and how it works in the Main Street Fairness Act. Unlike any other article we’ve seen on the subject, this one discusses SSUTA’s small seller exception:

One definition, not elaborated on in the legislation, but found in the SSUTA, is the small seller exception. Cory Barwick, Lead Tax Analyst at CCH -a Wolters-Kluwer business, explains that the SSUTA’s small seller exception “allows businesses with less than $500,000 in annual revenue to be exempt from the remote (out-of-state) seller collection requirement.” According to Barwick, who reports on Streamlined Sales Tax developments for SalesTaxSupport.com, “the Streamlined Sales Tax Governing Board has made many revisions to the SSUTA since its inception in an effort to entice states to become members to the agreement, including the November 2010 update to the small seller exception,” which he adds, “makes sense as these businesses are the ones that generally cannot afford the expense associated with the collection of remote taxes.”

Of course, we feel that collecting sales tax online shouldn’t cost businesses anything, which is why we’ve made TaxCloud free to all retailers. But if small businesses are concerned about the potential costs of online sales tax collection, the small seller exception should put them at ease.

Dion also makes it clear that the Main Street Fairness Act is not a nationwide “Amazon tax”:

By the way, although the proposed Main Street Fairness legislation and the state “Amazon laws” have a similar goal—to require the collection of sales tax by out-of-state sellers who do not have a physical presence in their state—the Main Street legislation is not a national “Amazon law.”  These state laws are presumptive nexus laws, meaning that if a business engages in the activity described in the law, a presumption of “nexus” arises. Nexus, an oft overused term, means that a business has established a sufficient connection to a state to allow that state to subject the business to taxation or, in the case of sales tax, to impose a sales tax collection requirement. State “Amazon laws” focus on an expanded view of nexus—in essence, that the use of in-state “affiliates” who post a web-link to the out-of-state seller’s on-line store is akin to creating a physical presence in the state.
But the Main Street Fairness legislation makes no mention of nexus. What’s key here is that states must be full-member SSUTA states in order to have the right to assert a collection requirement on out-of-state sellers. Essentially, the use of in-state “affiliates” that refer customers to an out-of-state seller via a web-link becomes irrelevant under the Main Street legislation.

In other words, under the Main Street Fairness Act, there would be no need for retailers like Amazon and O.co (formerly Overstock.com) to drop their affiliates—no need for states to pass sales tax laws focused on affiliates in the first place.

We have to disagree with Dion on one subject, though. At the end of the article, she asserts that the Main Street Fairness Act doesn’t have bipartisan support. We disagree. While the official sponsors of the bill are Democrats, numerous Republican politicians have voiced their support for this legislation—among them, Senator John Boozman, Tennessee Governor Bill Haslam, and Indiana State Senator Luke Kenley. There is absolutely nothing partisan about the Main Street Fairness Act—it doesn’t create a new tax or raise taxes; it simply ensures all retailers follow the same sales tax rules; and it gives states complete control over their own sales tax laws—and we believe that we’ll see more and more Republicans voicing support for the bill in the days to come.

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Main Street Fairness Act could mean elimination of inheritance tax, says IN lawmaker

August 24, 2011

Indiana State Senator Luke Kenley, chairman of Indiana’s Senate Committee on Appropriations and president of the Streamlined Sales Tax Governing Board, last week issued a statement urging Indiana’s congressional delegation to support the Main Street Fairness Act, which was introduced on July 29 by Senator Dick Durbin. He suggested that should the bill pass, Indiana could eliminate the state’s inheritance tax:

Kenley (R-Noblesville) also said he hopes state lawmakers would agree to use the nearly $200 million in additional revenue the state would receive from the passage of the federal legislation to eliminate Indiana’s inheritance tax and reduces others . . . .

“Hoosier bricks-and-mortar businesses are at competitive disadvantages with online retailers who often do not collect sales taxes on Internet purchases, costing our state as much as $200 million annually,” Kenley said. “Though consumers are required to report and pay a ‘use tax’ on Internet purchases when they file their taxes each year, many unknowingly fail to do so, costing Indiana and other states substantial revenue—an estimated $11.4 billion nationwide each year.”

Kenley isn’t the first to suggest that improving the collection of sales tax could allow states to cut other taxes. As we blogged about a few months ago, West Virginia delegate John Doyle has said that if online retailers regularly collected West Virginia sales tax, the state might be able to end its tax on groceries.

Kenley also pointed out that the Main Street Fairness Act will benefit Indiana retailers as well as the state’s schools and other essential services:

A 1992 U.S. Supreme Court ruling, known as the Quill decision, determined retailers are not required to collect sales taxes in states where they do not have physical locations unless mandated by Congress. As a result, many consumers visit a store to compare or test products, but then make their purchases online—often avoiding payment of sales taxes, Kenley said.

If enacted, the Main Street Fairness Act would create a uniform sales-tax collection system ensuring all businesses—both online and brick-and-mortar retailers—collect uniform sales tax for purchases. The act would also relieve consumers of the legal burden to report to state tax departments the required sales tax they owe for online purchases.

“I am asking our congressional delegation to support a modern, streamlined, pro-business initiative that will help our thousands of retailers who are being discriminated against under the current policy,” Kenley said. “This is not a new tax but one that is already owed and not being collected. With sales tax serving as Indiana’s largest source of revenue, our K-12 schools, higher education institutions, public safety and other essential state services are hit the hardest by the current system. It’s time we level the playing field for our local businesses and remove this unfair burden from Hoosier consumers.”

We applaud Senator Kenley for making his support for the Main Street Fairness Act known to his state’s DC representatives. The legislation is hugely important for states, since it gives them the ability to determine for themselves how (and whether) online sales tax should be collected for the state. But since it’s federal legislation that will be enacted (or not) by Congress, state lawmakers need to make sure their representatives in DC know just how important the bill is for them.

We hope other state lawmakers will follow Senator Kenley’s lead and contact their state’s representatives in Congress to let them know that they support the Main Street Fairness Act.

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Internet Tax Freedom Act does NOT ban sales tax

August 10, 2011
Internet Tax Freedom Act Amendments Act of 2007

Internet Tax Freedom Act Amendments Act of 2007 (110th congress - H.R. 3678)

Although we see less of this now than we used to, there is still some confusion over the Internet Tax Freedom Act and how it affects sales tax on online purchases.

The truth is, it doesn’t. The Internet Tax Freedom Act (ITFA) was passed in 1998 and renewed/extended in 2007 (it’s now good through 2014) to ban taxes on internet access and internet-only goods or services, such as email and bandwidth. But ITFA expressly did not ban sales tax on online purchases (though it did say that sales tax on online goods must have the same rate as the same goods purchased offline).

As the Main Street Fairness Act has been getting a lot of press attention lately, we’ve seen a few articles, such as this one, that have mistakenly attributed the current rules on online sales tax (including the role of nexus) to the Internet Tax Freedom Act. So consider this an addition to our earlier list of mischaracterizations about online sales tax: The Internet Tax Freedom Act does not ban sales tax on online purchases.

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Poll results about online sales tax collection expose myths vs. facts

July 27, 2011

Two recent polls on online sales tax highlight the fact that a lot of misinformation is circulating about online sales tax collection.

The first poll, from the International Council of Shopping Centers, found that two-thirds of U.S. consumers in states with sales tax are unaware that sales tax is due on online purchases:

Sixty-four percent of U.S. consumers in states that require their residents to pay a sales tax on purchases either do not know or do not believe they are required to pay sales tax on Internet purchases if not collected by the vendor, according to a new survey by the International Council of Shopping Centers (ICSC). . . .

Consumer compliance with the use tax payment on online purchases is generally low. A key reason for this, as the ICSC study found, is that consumers expect the vendor to collect sales taxes if they owe them. 

The poll results include several other fascinating findings—among them, that “93% of consumers would continue to shop online if taxes were collected at the point of purchase” and “more than 50% of respondents cited ‘price’ as the most important factor when making a purchase”—and we recommend you review the complete results.

The second poll actually, and inadvertently, demonstrates the results of the first poll.

Conducted July 6-17, 2011, the latest USC Dornsife/Los Angeles Times Poll shows 46 percent of voters favoring the online sales tax as a revenue source to help balance the budget and pay for state services. Forty-nine percent opposed the measure, which would raise taxes and could hurt local businesses who sell products through online retailers such as Amazon.com.

“At this point, Californians are evenly divided on whether online purchases should be taxed. This could be one of the most expensive campaigns in California history, and neither side starts with a clear advantage,” said Dan Schnur, director of the USC Dornsife/Los Angeles Times Poll and director of the Unruh Institute of Politics at USC.

The problem is, of course, that online purchases are already subject to sales tax, and always have been. By asking respondents if they support taxing online sales, the pollsters completely missed the point. The California measure they wanted to ask voters about would not, despite what they say, raise taxes. It would simply define which online retailers must collect the existing California sales tax on online purchases. We would have been very interested to see the results of a poll on the actual legislation; it’s too bad that the pollsters got this one so wrong.

But it does highlight the fact that, as the first poll suggests, there is a lot of misinformation out there about online sales tax collection. So we thought it would be helpful to address some of the most common myths about online sales tax collection and uncover what the facts really are.

States where internet purchases are taxableMyth: By requiring online retailers to collect sales tax, the government is raising taxes.

Fact: Sales tax is already due on online purchases, whether or not the retailer collects it. This is true in all 45 states with sales and use tax laws—most of which were enacted more than 50 years ago. As we have said before, this is not a new tax.

Right now, a consumer who buys online without paying sales tax is required to calculate the sales tax due—which is called “use tax” at this point—and remit that tax directly to the state with their tax returns. However, most consumers are unaware of this requirement, and so most sales tax on online purchases goes unreported. It’s nearly impossible for states to ensure that consumers remit the correct use tax, so instead, several states have tried to get online retailers to collect sales tax, just as bricks-and-mortar retailers do. But these attempts are often perceived as tax increases, when in fact they’re nothing of the sort. Whether you the consumer send the sales tax directly to the state or the retailer collects the sales tax when you make your purchase, sales tax is still due on online purchases.

We can’t say this enough: States aren’t implementing a new tax or raising taxes on online purchases.

Myth: Calculating and collecting sales tax for every tax jurisdiction nationwide would be too difficult for online retailers.

Fact: Today’s technology makes it easy for a retailer of any size to calculate and collect sales tax for every tax jurisdiction in the nation. It’s no more difficult than calculating shipping rates in real time, something nearly every online retailer does.

We can’t emphasize this enough: Calculating and collecting sales tax is no longer an administrative burden, not even for the smallest sole proprietorship. Inexpensive, even free, software and services (such as TaxCloud) are available to make this easy for any retailer. In fact, most small online retailers already use shopping cart services that are looking at the best way of providing sales tax calculation for their merchants. We promise, online retailers are not going to suffer because they have to collect sales tax.

Myth: It is only fair that internet companies are not obligated to collect sales tax. After all, brick-and-mortar retailers don’t have to charge for shipping.  

Fact: Shipping costs are factored into the business model of internet retailers—if you want to sell something without the expense of maintaining a local store, you have to figure out a way to get the goods to the consumer. Online retailers’ current exemption from collecting sales tax is an artificial advantage, based on the inefficiencies of use tax collection (consumers get a lower price if they forget to pay the use tax). Sales tax was never intended to offset shipping costs.

Myth: Local retailers cannot claim that this is an issue of fairness—a bricks-and-mortar store is free to sell online and avoid collecting sales tax too.  

Fact:  Requiring local retailers to collect sales tax when online retailers don’t have to is unfair, plain and simple—regardless of whether a local retailer also has an online store. To take this argument to its logical conclusion, in order to make things fair everyone should just sell online—which would mean no local stores at all. Envision your community without a bookstore, coffeehouse, or clothing store; that’s not what anyone wants.

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Bloomberg View editorial endorses taxation without representation

July 26, 2011

An article editorial from the National Review published late last night (7/25/2011) by Bloomberg View offers a frightening proposal . . .

Although the article starts out with a somewhat disrespectful tone regarding the Alliance for Main Street Fairness (which seems frankly uncalled for and doesn’t seem to enhance the article at all), it admits that the lack of sales tax collection on online purchases “is indeed unfair both to the mom-and-pop retailers . . . and to the larger companies.“

The author should have mentioned that it is also unfair to local communities—communities that rely on sales tax revenue to fund vital local services that voters/consumers/taxpayers approve, either directly, through ballot initiatives, or indirectly, through their elected local governments. The National Conference of State Legislatures calculates that non-collection of sales tax on internet and mail-order purchases will cost over $23 billion during FY2012.

Strangely, as the solution to this enormous national problem, the author proposes a national origin-based sales tax system:

A far better solution would be for states to levy sales taxes based on where products are coming from rather than on where they’re going.

To understand the problem with this idea, one must first remember: Sales tax is local.

Our country was founded on the most basic concept of taxation with representation. That is why each state has its own House of Representatives and Senate—to ensure that there is local representation and a local voice regarding why, how much, and for what purpose you and your community will be taxed.

To adopt the origin-sourcing concept at a national scale would mean that if you bought something from an online store that charged you sales tax based upon where that online retailer is located, then you would be paying a sales tax you did not vote on.

Consider if you lived in California and bought a $1,100 LED TV from an online consumer electronics store based in New York City. Under the author’s plan, the NYC retailer would add 8.875% to the price of your TV ($97.63) and remit those proceeds to the retailer’s jurisdiction—New York City—not your California jurisdiction.

Under such a plan, you would be forced to pay a tax without any representation.

Origin sourcing gets even more toxic at a national scale. Consider how many e-commerce retailers in California or New York (or any of the 45 states with sales tax) would immediately relocate all operations to a state with no sales tax just to stay competitive—if you think your property and income taxes are high now, imagine what would happen if 40% of these states’ annual budgets vanished overnight.

The author bases his proposal on a PricewaterhouseCoopers study published in 2006, which was researched in 2004 and is based on costs incurred by retailers in 2003. To be blunt, this research is hopelessly out-of-date. Fortunately for all of us, technology and the internet have come along way since 2003! For example, in 2003 Facebook and YouTube did not exist and Google was still a private company. Also, since 2003, the Streamlined Sales and Use Tax Agreement has achieved significant simplifications in state-by-state sales tax laws, and today 24 states  (more than half of the 45 states with sales tax) have voluntarily adopted its simplification measures.

The article says the anticipated Main Street Fairness Act “imposes costs on the economy out of proportion with any revenue it might generate.”

I am sure the author and his readers will be happy to learn that this concern is moot. Our company launched TaxCloud over a year ago, and it calculates, collects, remits, and even responds to audits for retailers—all at no cost. Using TaxCloud, any retailer (large or small, online or offline) can collect accurate local sales tax for any address in the US in 13 milliseconds, with no cost burden and minimal technical burden.

Once again, sales tax is local—when online retailers refuse to collect, it only hurts your community.

Finally, the article is also surprising given that we briefed their editorial staff about this matter (in February), and Bloomberg has published three very supportive articles over the same number of months:

  1. Bloomberg.com supports online sales tax collection - 7/15/2011—just 11 days ago
  2. Bloomberg Businessweek article reaches surprising conclusion - 6/6/2011
  3. Businessweek editorial: “To help Main Street, close the internet sales tax loophole” - 5/2/2011
Apparently we need to request another briefing.
UPDATE: The author is not a Bloomberg editor but rather a senior editor at National Review.

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Business Insider article contains misinformation

July 22, 2011

An article in Business Insider on online sales tax collection contains so much misinformation—including a truly ridiculous assertion, addressed at the end of this post—that we had to respond.

- On the fact that currently, only retailers with a physical presence in a state—an office, warehouse, or even salesperson—are required to collect sales tax for that state, the article says that makes sense:

Taxes are meant to fund government expenses, but if an individual or corporation cannot receive any benefit from that government expense, then that individual or corporation should not be taxed for that expense.

But of course, no one is suggesting that the retailer be taxed—only that the retailer collect sales tax, which is indeed paid by those who benefit from what sales tax pays for. Sales tax funds community services and initiatives such as schools, police, parks, libraries, and more. When an online retailer collects sales tax, that tax is remitted back to the state where the consumer—who, again, paid the tax—is located, and it funds services in the consumer’s community.

Yes, sales tax should be paid only by those who benefit from the services sales tax funds. And that’s exactly what happens when online retailers collect sales tax.

- On states’ adopting legislation that requires online retailers to collect sales tax, the article simply gets its facts wrong:

States need this money and are now finding creative ways to structure their tax codes to ultimately require Internet transactions to include a state’s sales tax.  So far, 11 states have enacted some legislation to tax these online retailers, mainly targeting the big fish. 

Not at all. First, online transactions have always been subject to sales tax. No state with sales tax needs to alter its tax codes, creatively or not, to make online transactions subject to sales tax—they already are. Second, no state is enacting legislation to “tax these online retailers, mainly targeting the big fish.” Again, states that are implementing new legislation are asking online retailers to collect sales tax, not pay it. It’s an important distinction.

Business Insider article suggests internet is a lawless pirate's land devoid of any jurisdictional authority.

Business Insider article suggests internet is a lawless pirate's land devoid of any jurisdictional authority.

- On internet transactions in general, the article gets truly ludicrous:

In theory, the Internet is a separate location and not part of any state or country.  Transactions that occur in the Internet cannot be claimed to have occurred in a state or country.  

This is simply absurd, even “in theory.” By this logic, there would be no way to stop internet fraud or any cybercrimes—if the event did not occur in any state or country, it wouldn’t be subject to any laws. Although this may upset the pirates in the audience, the suggestion that transactions on the internet are not subject to state or national law is simply ridiculous.

Nothing on the internet happens “nowhere.”

Internet shoppers (and retailers) are located in a physical jurisdiction and are subject to laws of that jurisdiction (including city, county, state, and federal laws). Anti-money laundering and anti-terrorism laws (among others) in the US and around the world all agree on this matter.

Black pearl (necklace) is already subject to sales tax

Black pearl (necklace) is already subject to sales tax in 45 states

Yes, even if you buy a black pearl online, it is still subject to sales tax. However, if you buy it from Blue Nile or Amazon, they probably will not collect the sales tax due—so don’t forget to report your purchase to your state and remit the sales tax.

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Lax tax for e-commerce cost US 260K jobs

July 19, 2011
Missouri News Horizon

Missouri News Horizon: Online shopping costing jobs

According to an article in the Missouri News Horizon, Dr. William Fox, director of economics at the University of Tennessee Center for Business and Economic Research and the co-author of a 2009 study on state and local revenue losses due to uncollected sales tax on online purchases, has presented new research at the Southern Legislative Conference in Memphis.

Although many at the conference have been focused on Amazon and its recent actions regarding sales tax, Dr. Fox looked at the larger picture and examined the effects of e-commerce not only on state revenue but also on jobs:

“The Amazon part is only about 5 percent of e-commerce,” he said.

But Fox said his center’s research estimates the total of e-commerce is about $4 trillion, with about $46 billion in taxes due across the nation. He said most states surveyed are going to lose about $200 million or more this year due to uncollected taxes on e-commerce.

But the issue goes far beyond uncollected sales taxes, according to Fox. There was consistent growth in retail employment until about 2000, a rate of about 2 percent per year.

“Since 2002, retail employment in the U.S. has absolutely flattened out,” Fox said.

To put a sharper focus on it, Fox told lawmakers Walmart hires five workers for every million dollars in sales. Amazon hires one.

“As we move from people who buy on Main Street, and they move to buy from Amazon because of the tax subsidy that is implicit in the way we pay, we cost the economy four jobs,” he said. . . .

Fox figures the costs to the country because of e-commerce in general is 260,000 retail jobs.

“This is not a little issue. It’s not a small concern,” Fox said. “They don’t need a subsidy to operate. E-commerce associated with business-to-consumer sales this last year grew 18 percent, while commerce on Main Street essentially grew zero percent.” (emphasis added)

To put that figure of 260,000 lost jobs in perspective: The last jobs report indicated that just 18,000 jobs were added in June, giving rise to speculation about a double-dip recession and raising the unemployment rate to 9.2%.

This data is critically important. With unemployment still high and even rising a year after the recession technically ended, everyone is concerned about jobs and job growth—but this is the first time we’ve seen figures on the effects the online marketplace is having on jobs.

North Carolina’s Secretary of Revenue, David W. Hoyle, also presented at the conference, and the article offers more details on what he had to say about Amazon and North Carolina’s efforts toward collecting sales tax online.

We highly recommend you read the entire article.

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California Attorney General says… OK

July 19, 2011

California’s Attorney General has allowed Amazon’s proposed referendum to repeal ABX1 28.

The title:

“REFERENDUM TO OVERTURN LAW REQUIRING INTERNET RETAILERS TO COLLECT SAME SALES OR USE TAXES AS OTHER RETAILERS”

Wow, this should be interesting…

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Posted by FedTax

Politico: E-tailers vs. retailers on tax issue

July 18, 2011
Politico: E-tailers vs. retailers on tax issue

Politico: E-tailers vs. retailers on tax issue

Politico has a comprehensive article today on the online sales tax debate going on throughout the country.

The only point we take issue with was this statement tucked in the middle of the article:

Another concern is that the crazy quilt of local and state taxing jurisdictions is too complex for online retailers, particularly small businesses, to manage.

This should not be a concern. Admittedly when the Supreme Court dealt with this issue in 1967 (Bellas Hess) and 1992 (Quill), such concerns of complexity were legitimate, but not anymore. Thanks to a decade of effort by 44 states and businesses to create the Streamlined Sales and Use Tax Agreement, our TaxCloud service now enables retailers (online and offline) to calculate and remit sales tax across the country—and for Streamlined states, it can also automatically handle registration and periodic filings, and will even respond to any jurisdictional audits. And most importantly, TaxCloud is completely free.

Finally, the Quill decision openly invited Congress to resolve this issue. We thank Senator Durbin and all other sponsoring senators for showing the courage to finally resolve this issue so individual states don’t have to keep pushing the boundaries of the definition of nexus just to collect the sales tax already due.

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Bloomberg.com supports online sales tax collection

July 15, 2011
Amazon.com, Infant No More, Should Be Charging Sales Tax: View

Amazon.com, Infant No More, Should Be Charging Sales Tax: View

In a new editorial, Bloomberg.com comes down firmly on the side of online sales tax collection:

There are lots of good reasons to shop online, but dodging sales tax shouldn’t be one of them. Amazon.com Inc. (AMZN) is battling the authorities in its largest state market, California, over this principle. The good arguments are on the Golden State’s side.

Among those good arguments, the article cites the following:

  • Local retailers have to collect sales tax while online retailers don’t, putting local retailers at an unfair disadvantage: “Brick-and-mortar retailers have been fuming about this disparity for years. “We’re at a huge competitive disadvantage with online retailers,” says Bill Dombrowski, president of the California Retailers’ Association. “It’s bleeding us.”
  • States are losing millions of dollars in uncollected taxes: “California’s fiscal experts aren’t happy either. State Assemblyman Charles Calderon estimated that California was missing out on $83 million a year in sales tax that wasn’t being collected by Amazon. (The state asks taxpayers to compute their online tax obligations as part of annual income tax filings, but hardly anyone does.)
  • Sales tax is necessary to pay for vital community services: “It’s important to remember, though, that sales tax isn’t just a nuisance charge you pay every time you eat at a restaurant, buy a T-shirt or get your car’s oil changed. In the 45 states that charge sales tax, these levies are a major way of paying for roads, police, teachers and other services.”

Note, however, that one of the first points the editorial makes includes several inaccuracies, which we’d like to clarify:

Online stores rang up more than $170 billion of purchases last year, accounting for about 9 percent of all retail sales. That’s a far cry from these merchants’ tiny start in 1998, when Congress granted a three-year reprieve from taxation, believing that the fledgling Internet sector needed help getting started.

This is a reference to the Internet Tax Freedom Act, which prohibited any new or discriminatory taxes on Internet access. It did not, however, prohibit the collection of existing sales or use tax on e-commerce transactions (as our friend Michael Mazerov at the Center for Budget Policy and Priorities points out).

We also believe that the $170 billion in online purchases in 2010 is too low a figure. Although it is based upon Census Bureau data, it doesn’t include other remote retail transactions including mail-order purchases ($106 billion) and online auctions ($75 billion—eBay’s 2010 Gross Merchandise Volume, per this source); when those figures are included, the number more than doubles, to approximately $350 billion in sales for which sales tax is not collected. (See our January post on the Census figures for more.)

Here’s the math: at an average national sales tax rate of approximately 6.8% (not that we are suggesting there should be a national sales tax!), that’s $23.8 billion in uncollected sales tax. (For those of you who follow this debate, that number probably looks familiar: it’s the one lawmakers and politicians frequently cite.)

The editorial concludes:

In pushing the referendum, Amazon has been arguing that California needs to do more to attract business, not drive it away. That’s doubtlessly true, but it’s hard to see how lenient tax treatment for online retailers furthers that goal. As the sponsor of California’s new law rightly put it in May, “If you oppose this bill, you support tax evasion.”

It’s a terrific statement of support for California and online sales tax collection from a pro-business source. The only thing that could have made it better is if it had voiced support for federal legislation, which is the best way to ensure all retailers follow the same sales tax collection rules and at the same time provides an incentive for states to simplify their sales tax collection guidelines.

Nevertheless, we’re thrilled to see Bloomberg take an unequivocally positive stance in favor of online sales tax collection.

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Posted by FedTax

New York Times: Amazon takes on California

July 14, 2011
The New York Times: Amazon Takes on California

The New York Times: Amazon Takes on California

The New York Times just published an article covering the AMZN proposed referendum to repeal ABX1 28.

One part, which we are now investigating, really caught our eye:

Amazon said this week that it would push a voter initiative in California that could eliminate sales tax for virtual sellers with only a modest physical presence in the state. (emphasis added)

We hope that the voters of California don’t get tricked into thinking the referendum would actually repeal the sales tax itself. Regardless of the outcome of this proposed referendum, if a “virtual seller” refuses to collect sales tax, consumers will still owe it—just as they have in California since 1935 (no, that is not a typo).

All-in-all, it is a well-written and thorough piece, but we wish the writers had pointed out the fact that with federal legislation, such as the much anticipated Main Street Fairness Act (MSFA), states could legitimately repeal affiliate nexus laws (no voter referendum necessary) while simultaneously generating significantly more revenue. This is because the MSFA would authorize states (those that have simplified their sales tax laws by adopting SSUTA guidelines) to compel remote retailers to collect sales tax at the time of the transaction. This would allow states to collect the approximately $23 billion in sales tax that goes uncollected each year (nearly $1.7 billion in California alone).

We will let you know what we learn about the “eliminate sales tax“ quote.

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LA Times: Jobs are key in the online sales tax argument

July 13, 2011
Los Angeles Times

Los Angeles Times: Amazon sales tax battle centers on jobs

A Los Angeles Times article examines the Amazon proposed referendum on California’s affiliate nexus legislation and what it calls the “escalating rivalry between Amazon and bricks-and-mortar retailers, which have seen an increasing portion of their sales go to the Internet.”

It has an efficient summary of each side’s argument; unsurprisingly in this economy, both focus on jobs:

Those conventional retailers say they are at a disadvantage because consumers perceive that they don’t have to pay sales taxes on Internet purchases, in effect giving buyers a discount of nearly 10%.

The stores also point out that they provide jobs — to salespeople, clerks, cashiers and more — and that California can ill afford to give a tax amnesty to Internet retailers that operate elsewhere.

“Amazon’s continued disregard of the law has cost this state over 18,000 lost jobs and a $4.1-billion loss in sales resulting in over $7 billion in lost economic activity in 2010 alone,” the California Retailers Assn. trade group said. “Their actions will continue to harm our schools, police, fire and the tens of thousands of small businesses who provide jobs and invest in our state every day.”

For its part, Amazon emphasized the jobs issue by saying that the new law has forced it to sever ties to 10,000 affiliates in California who are paid commissions to steer buyers to Amazon’s site by click-through links on their sites.

By cutting off California affiliates, the company hopes to avoid the key criterion — some presence in the state — that would make it subject to collecting sales taxes.

“This referendum effort is a vehicle for affiliate marketers to continue to do business in California, which translates to real income for the state as these businesses pay their income tax, employment tax plus other tax,” said Rebecca Madigan, executive director of Performance Marketing Assn., a trade group for affiliates. Amazon would not comment, instead referring to her statement.

And what are the referendum’s chances attracting the 500,000+ signatures required to get on the ballot? Then, what are the chances of it passing? According to the article, both sides have a strong case:

When it comes to jobs, mega-retailers Wal-Mart Stores Inc., Target Corp. and scores of others can make a stronger argument than Amazon. But experts cautioned not to count out Amazon, as well as consumers’ own greed in wanting to shave taxes of 7.25% or more off their final prices — even though they legally owe that money.

There’s also a terrific exploration of how—and why—online sales are growing and sales tax revenue is shrinking.

We hope that the voters of California don’t get tricked into thinking the referendum would actually repeal the sales tax itself. Regardless of the outcome, the sales tax will still be owed by the consumers, just as it has been in California since 1935 (no, that is not a typo).

The article is definitely worth reading—go check it out for yourself.

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