Internet Sales should be taxed.

Such a statement seems to cause a great deal of anxiety – but why?

The ability of state and local governments to collect sales and use tax on transactions which occur through traditional retail outlets is widely accepted and understood. Although taxes are particularly unpopular, we all know that taxes are necessary to fund such vital government services as education and public safety. Voters routinely approve local sales taxes to pay for sports facilities, police protection, land acquisitions for public spaces, and transportation projects. It is simply unfair to require local businesses to collect and remit local sales taxes, while not requiring so-called “remote sellers” to do the same.

With contemporary companies like Amazon.com® and services like Apple® iTunes®, no one questions their technical ability to keep track of hundreds of thousands of products, and over 30 million transactions per quarter.  Based upon such technological and business advances, many states have been working on tax-code modernization and standardization efforts to ensure keeping track of this information could no longer be considered unreasonable – even with the thousands of rule and jurisdictional boundary changes each year, and the wide variety of exemptions and exceptions which vary from state to state.

With Internet e-commerce sales revenues in the United States reaching over $2.5 trillion in 2007, the states’ inability to collect related sales taxes on these transactions cost them over $7 billion in lost revenue, in 2007 alone.  Now, with the economy in distress, and many states enduring significant budget shortfalls, congress is preparing to act.  The “Main Street Fairness Act of 2009” is now set to be introduced before congress, and is drafted “to grant states the authority to require all sellers, regardless of nexus, to collect those states’ sales and use taxes”.

What do you think?

7 Responses to Internet Sales should be taxed.

  1. Keith Yockey says:

    Your premise of the blog presume that eCommerce has the power of Amazon/eBay. I assure you they do not. Small eCommerce businesses like mine do not have the funds to pay for software or hire a service to keep track of or hire a service to track down and file taxes for 8700 tax districts. And by the way, unless you are a very high volume seller on Amazon, they do not collect sales tax on behalf of the seller, even in Washington State, the headquarters of Amazon, and States where they have established nexus. They choose instead to blatantly ignore the law.
    The solution is for States to enforce existing Use Tax law, not to go out and make new law to make up for failed policy. The solution is simple: Have the Merchant accounts (Visa, MC, PayPal, Authorize.net) collect use/sales tax and remit the tax directly to the State. In turn, the States would pay for the related fees. This system would work not only for online sales, but also retail brick & mortar stores as well. The data and infastructure is already in place, just add software. States get instant monies, consumers get taxed fairly, and it saves money for merchants in fees and bookwork.
    Details here: http://www.thedumbdog.com/blog/?p=62

    The push for SST and the Main Street Fairness Act violates States Rights and the 10th Amendment. It also doe not address States who do not have Sales Tax, but enforcing Use Tax would eliminate the current advantage they have now.

    • Fed-Tax.net says:

      Dear Mr. Yockey;
      Thank you for your thoughtful and detailed post, and your creative suggestion for having the merchant banks handle sales tax collection and remittance. We would like to take this opportunity to “flesh-out” some of your thoughts – which we will address in reverse order from your post:

      The Contemplated Main Street Fairness Act of 2009 – As I am sure you are aware, this bill has yet to be introduced, so speculation of what it may or may not contain can be a dangerous and slippery slope, but we do expect it will have language along the lines of:

      “granting states the authority to require all sellers, regardless of nexus, to collect those states’ sales and use taxes”

      Certainly this blog is not an appropriate forum to argue the merits or constitutionality of this language relative to the 10th Amendment (which re-iterates States’ sovereignty), or even the 14th Amendment (with its Due Process and Commerce Clauses). Having said that, it is our opinion that granting states the authority to require remote sellers to collect sales taxes for the locality of the purchaser actually reinforces States’ sovereignty. As you point out, local consumers are already legally obligated to declare and remit use taxes at a rate and amount equivalent to them having made whatever purchase on their doorstep. Such obligatory use tax declarations and remittances are rarely adhered to by consumers, and would be massively difficult to enforce by states – particularly when the transactions in question involve digital works (such as mp3’s, movies, e-books, software, etc.).

      Merchant Banks as Sales Tax Management Services – This would certainly be a viable option for “atomic” transactions – involving only items with one possible tax classification. However, as I am sure you will appreciate, a majority of credit card transactions involve multiple discrete items, each with potentially different applicable sales tax rates (such as clothing, food ingredients, prescription drugs, digital audio works, etc.). The only way a merchant bank could handle such a diverse array of applicable tax codes would be through specific knowledge of all the items or services being purchased – this is not likely to occur.

      Even if the seller swore to the merchant bank that all goods and services to be sold were only one tax classification (i.e.: clothing), the merchant bank would still not be able to confirm the intended destination of the purchase beyond the billing address of the customer. As an online seller yourself, I am sure you are aware that billing address and shipping address are frequently distinct and separate locations – and should billing address become tax determinative, it wouldn’t take long for sophisticated consumers to change their billing address to an offshore mail forwarding address. Of course, if the merchant banks were to modify their systems to also require shipping addresses be submitted for all card-not-present transactions this challenge may surmountable, although unlikely.

      Costs to small businesses – This is our most sensitive and guiding concern. We also agree with you, that the current options available are all way too expensive to mandate upon small businesses (or large businesses for that matter). That is why we are building our Fed-Tax.net services, which will be completely free to implement for sellers.

      Our contract with you is simple – you diligently classify each and every one of your products or services which you are selling (with a simple web form we provide), and we will calculate the appropriate tax rate (or exact tax amount, if you prefer), based upon your customer’s shipping destination zip code. We will do this completely for free, so long as you tell us whether or not your transaction completed.

      Once fully operational, our service will also prepare simplified electronic state-by-state sales tax returns on your behalf, and if you choose, we will even remit collected taxes on your behalf – once again all at no cost to you, the seller. We believe that the technology to do this is ready.

      At Fed-Tax.net, we feel this is simply the right thing to do as citizens – for consumers, for sellers, and for the states.

      We welcome your thoughts, and thank you for your comments.

  2. Keith Yockey says:

    Thanks for your reply.

    Your solution has many great points, but there are still problems.

    ~ If States cannot enforce existing Use Tax law, it should be abolished before writing new law to cover failed policy. At least my solution has a chance of working and puts the burden of tax on the consumer rather than the seller. IMO one reason it is not enforced is that Legislators prefer not to hear more wrath from consumers. They do, after all, wish to be re-elected.
    ~ Off-Shore mail forwarding address. If it were to be true, it would be a very small number; even for those who have a Post Office Box in a different State. The shipping address, would always be the same. PayPal, for example, has this information and ties it to buyer/seller protection in case someting goes wrong and a claim is filed. There will always be tax avoiders. Google this subject and read blog comments. Many comments I have seen have stated they would shift purchases to only non-us sellers. How will SST or States collect Use Tax for those purchases? I haven’t addressed cash/check/money order purchases either, but those too could be hidden from being taxed. If the small number of ‘law-breakers’ turns out to be a large problem, I’m sure the IRS / State DOR would take action.
    ~ Your service shows promise. The downside is extra book work, yet another burden for business of all sizes. There is also a matter of security. Your company wants knowledge of my complete inventory. This information in the wrong hands could ruin many businesses.
    ~ Tax districts are not divided by zip code. In fact, there could be several tax rates within the same zip code. Greer, SC is a prime example. The County Line runs through the middle of the City, so on one side of the street, Sales Tax is 6%; across the street, it’s 7%. The only way to truly locate tax districts is with GPS (latitude/longitude location). My home address is a prime example. I live in one county, yet my zip code is for an adjacent county’s zip code.
    ~ Fees I pay my merchant accounts on tax collected are monies that do not belong to me, they belong to the State DOR. This is an addtional out of pocket expense businesses pay. My proposal would shift that cost to the States. I would gladly waive the discount the DOR gives me know.

    The right thing to do? My vote is less complication of law. Enforce existing law, or do away with it. Less tax and spending from Government would help too.

    Keith

    • Fed-Tax.net says:

      Good afternoon Mr. Yockney,

      Once again thank you for your considered response in our ongoing dialog. We would like to continue our discussion based upon your points raised, which we will again address in reverse order.

      Regarding the merchant accounts and credit card processors – Credit card processors are there to authorize a transaction and ensure payment changes hands. Credit card processors do not know what you are selling – particularly not as well as you, the seller, does. As the seller, you are the party with the most knowledge about your products. It is this fact that makes you the most appropriate party to indicate exactly how an item should be classified for tax purposes. As Mr. Peterson points out, the contemplated Main Street Fairness Act requires states to reimburse you for processing fees incurred due to the tax portion of each transaction, which should satisfy your concerns on that matter.

      Regarding tax jurisdiction sourcing – we agree that the traditional 5-digit zip code is insufficient for many tax jurisdiction determination purposes. Using a nine-digit Plus4 Zip Code is significantly more accurate. The US Postal Service also offers easy to use tools for address verification and Plus4 Zip Code determination. You offer a good point regarding using GPS for absolute jurisdiction determination, and there are quite a few options for automating address geocoding, which could easily be employed on our end for more complicated districts.

      Regarding our service – thank you for your input! We were admittedly not very clear in describing our service, and we cannot go into great detail about our services because they have not been announced/launched yet. What I can say is a) our security systems, policies, and procedures are comprehensive, and b) we do not want to know anything about your inventory, but we do want help you ensure that your all of your products/services are accurately classified for tax purposes.

      Regarding off-shore mail forwarding – we agree with you.

      Finally, Regarding States’ use tax laws – these laws, and states’ enforcement efforts are still valid and functioning under many circumstances – except online. Current use tax legislation was devised in a pre-Internet context, well ahead of our current reality. SSUTA holds forth the promise of that which we are all seeking – clear tax rules with minimal administrative burden. While we cannot speak on their behalf, we feel the herculean achievement of the Streamlined Sales Tax Governing Board (and its numerous constituents) has been the development of a comprehensive and thoroughly documented standardization of taxation rates and classification guidelines. SSUTA does not anticipate that each and every individual seller will engage in the cost and complexity of implementing all the technical aspects of compliance, rather they have established certification procedures to allow organizations (such as ours) to go “the last mile” in automating the systems between the sellers and the states.

      As always, we appreciate your ideas and your enthusiasm for coming up with an appropriate solution.

  3. Keith Yockey says:

    Thanks for your reply David.

    This whole matter is turning into a complicated mess.

    ~ Yes, a nine digit zip code would work, but who uses it? I can’t speak for other retailers, but I can talk a little about data from my business. Since 1/1/09, I have processed ~ 2,000 orders. They include sales on eBay, Amazon, and website sales. Of those, less than 15% have 9 digit zip codes in the shipping address. So we are going to tell the buyers what? They need a complete zip code before checkout? With a world full of ID identity theft, and a fear of Big Brother looking over your shoulder; asking consumers of more information than they perceive as legitimate WILL drive away sales. And BTW, I don’t know my 9 digit zip code … do you? Sure, you can look it up on the USPS website, but that is time consuming, and it would need to be done BEFORE the invoice is sent and billed … again, another loss of sales in the real time 24/7 internet world. And no, I don’t want to hear that I need to buy more software to accommodate clueless legislators. While GPS location might work, it also is too complicated to get up and running. Of course, there is another option … put bar codes on the buyer’s forehead, or an IF tag under the skin (Nah … scratch that … too Orwellian)
    ~ About Merchant accounts. My guess is you have never sold on eBay or Amazon. They both contain every detail of a transaction, whether it be new, used, food, clothing or general merchandise. My Merchant Account (Authorize.net) has a coded section for Sales tax, so the proper tax rate can be supplied, and they collect it on my behalf. All I’m asking is that they remit it to the States directly. That saves me and the State time and $$.
    ~ Yes, Mr. Peterson talked about the States reimbursing the fees on the tax. Of course the final wording has not been written, but assuredly this would not be a check in the mail, but rather a ‘credit’ to be filled out on a form. In the ‘We Love Paperwork’ world, this seems to be a natural way of life. I question whether I would believe this part of the proposed bill.
    ~ Use Tax Law. It applies to Internet Sales too. I know of no State Law where this type of transaction was excluded. The problem lies in the fact it is voluntary … a line item on the tax form we all fill out each year. … and taxpayers either ignore or lie on that line. Those that do pay are CPAs and accountants. Well, maybe a few more, but it is a very unreported tax. You claim it is valid and functioning? Again, I ask you to Google “Massachusetts Sales Tax” (news articles, blogs, etc.) and read the comments. See how many Mass. residents claim to goto Sales Tax free New Hampshire to purchase goods. Clearly they are breaking the Use Tax Law of Mass. Making the law mandatory rater then voluntary makes more sense than writing new law. Lawmakers prefer not to do this for fear of the wrath of taxpayers (voters). They prefer to be re-elected … so writing new law is easier for them.

    The more I look at the problem, the more complicated it gets. I still feel my solution is a workable one. Retailers and Merchant accounts can work together to collect and remit fair tax to make Government (along with consumers and small business) happy.

    Can we get the whole plan down to 25 pages or less? Can I file a form on 1 page or less? Better yet, can we get the States to enforce law rather than make new ones? Businesses are hard enough to run now. Adding this or that to what we have now will force many to close.

    Keith

  4. Jeff says:

    I get it that there should be fairness in the tax structure. Still, it depresses me that so many think that if we could only give the government more tax money, our financial woes would be over. A number of states have no, or very low state taxes, and the ones with high rates are hardly the states in the best financial shape. Government costs must come down, hopefully before our system goes the way of Greece, Ireland, or Iceland, and raising taxes just puts off the day of the spending reduction needed. Not to mention, taxes hurt business.

    I am certainly not a financial expert, but I wonder if a low (2% to 5%) flat tax has been considered? Divvy that up to individual states according to gross internet sales.

    • Fed-Tax.net says:

      Jeff,
      Thank you for your well considered statements and concerns. Your suggestion of a low, national “flat tax” seems like a good idea initially, but the implications of having the central federal government distributing such a national sales tax strikes the core of why the United States is not part of England. I imagine you will agree that a centralized authority can provide local services less affectively than the local governments can. When you pay sales tax in your state and city, you are paying taxes for services that directly affect, and are voted on by, you and your community, such as police, fire fighters, and schools. I doubt you want the federal government determining the allocations for all these local services. The more localized a tax is, the more the government can meet the particular needs of its constituents.

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