TaxCloud in the news!

October 11, 2012

TaxCloudWe’re happy to report that TaxCloud and FedTax have been in the news quite a bit lately.

An end to the free online tax ride nears: In this ComputerWorld article, TaxCloud user Ken Knezek, owner of Bandals Southwest, talks about how his small company has handled online sales tax

What the end of tax-free online shopping means for small businesses: Our CEO, R. David L. Campbell, was interviewed for this Reuters article on how small businesses will be affected by online sales tax

How you can prepare to collect online sales tax: And in an article in Independent Retailer, David offers some tips for online retailers who are thinking about starting to collect sales tax

It’s great to see so much attention being paid to the practicalities of what online sales tax really means for online retailers. As we move closer to federal legislation on the issue, we hope to see more articles like these!

Online sales tax collection is about states’ rights

September 27, 2012

At a hearing on the Marketplace Fairness Act before the Senate Commerce Committee on August 1, Senator Lamar Alexander (R-TN) emphasized that for him, online sales tax collection is all about states’ rights.

It’s an argument that seems to have puzzled a lot of people—we’ve seen several articles mischaracterizing online sales tax as a federal sales tax, and there’s some concern that with the Marketplace Fairness Act, the federal government would be getting involved in state issues.

So why did Senator Alexander say that he supports the Marketplace Fairness Act because it’s an issue states’ rights?

First, some background.

If you live in a state with sales tax, your online purchases are already subject to sales tax. If the online store doesn’t collect sales tax when you make a purchase, by law you are responsible for calculating the tax due and adding it to your state income tax return.

But states can’t enforce this law—they can’t check up on every citizen to see how much they’ve bought online and whether they’ve paid the correct sales tax—and they can’t require online stores to collect sales tax like brick-and-mortar stores do.

This is the result of two Supreme Court decisions, Bellas Hess (1967) and Quill (1992). In these decisions, the Supreme Court said that states can require a seller to collect sales tax only if the seller has a physical presence in the state.

Since states can’t a) require an online seller to collect sales tax if the seller has no physical presence in the state, or b) make sure individuals are paying the sales tax they owe on online purchases, they are powerless to enforce their own sales tax laws.

However, Congress can pass a law giving them back that ability, as the Supreme Court noted in their Quill decision. The Marketplace Fairness Act is one such law. It would not demand that online sellers collect sales tax. What it would do is give states the authority to, if they so choose, require online sellers to collect sales tax. It would be up to the states to decide whether and how to tax online sales.

This is why Senator Alexander called the issue a matter of states’ rights. States are currently powerless to enforce their own sales tax laws; the Marketplace Fairness Act would restore that power to them.

“Fair Is Fair”: A legal perspective on the Marketplace Acts

September 11, 2012

The latest issue of Shopping Center Legal Update, a “legal journal for the shopping center industry,” has an interesting article on the Marketplace Fairness Act, Marketplace Equity Act, and Main Street Fairness Act—the three bills currently before Congress that would each allow states to require online retailers to collect sales tax.

In the article, Brian D. Huben, a partner at the LA law firm Katten Muchin Rosenman LLP, provides a legal perspective on online sales tax collection. We were particularly interested in his analysis of the Supreme Court case Quill Corp. v. North Dakota (1992). That case is responsible for the current rules about sales tax that govern online shopping, and this is the first place we’ve seen its details explained by a legal expert.

We found this part of the article, which quotes the dissenting opinion in Quill, particularly enlightening:

Some say that the past is prologue. Justice Byron Raymond “Whizzer” White, who dissented in Quill, presciently noted that “an out-of-state seller in a neighboring State could be the dominant business in the putative taxing State, creating the greatest infrastructure burdens and undercutting the State’s home companies by its comparative price advantage in selling products free of use taxes, and yet not have to collect such taxes if it lacks a physical presence in the taxing State.” Quill Corp., 504 U.S. at 328 – 329. While the stakes in Quill were decidedly smaller, the $23 billion in uncollected sales and use tax revenue cannot be ignored.

While fairly brief, this article is a great source for those interested in today’s online sales tax rules, how they came to be, and why some are arguing for change.

States increase online sales tax enforcement–which is why retailers should support federal legislation

August 31, 2012

FedTax CEO David Campbell has a guest post on Forbes’ TaxGirl blog

Our CEO, David Campbell, has written a guest post for Forbes’ TaxGirl blog. The post tackles the provided topic “Is it fair to require online retailers to collect and remit state sales tax?” and focuses on the concerns of states without sales tax and why they should support federal online sales tax legislation. Take a look—we may be biased, but we think it’s a great read.

The post is particularly timely because of the recent sales tax news from California and Pennsylvania.

Both states are beginning to require online retailers, no matter where they’re located, to collect sales tax—even though no federal legislation granting them that power has been passed. States are no longer content to wait for federal legislation; they’ve begun taking online sales tax into their own hands.

As Mr. Campbell says in the post, this has particular importance for online retailers in non-sales-tax states because it means that even without federal legislation, it’s unlikely that they’ll be able to avoid collecting sales tax for long.

The LA Times has a great article on California’s move toward online sales tax. It includes this quote about increasing enforcement:

On Thursday, the tax agency announced new efforts that include spending $10 million over the next three fiscal years to hire nearly 100 tax specialists, auditors, lawyers and call-center operators. An additional 35 people will be needed in the fourth year, the board said recently.

These new workers are hired to identify and contact what the board estimates are “upwards of 2,000” out-of-state businesses that should be collecting sales tax under the new law and take action against any suspected scofflaws.

Pennsylvania, too, is increasing its enforcement of online sales tax collection, as this Internet Retailer article explains. Existing law says that any retailer with a physical location in the state must collect Pennsylvania sales tax. The state has said that this includes third-party retailers who use eBay or Amazon warehouses for order fulfillment, and beginning in September, it’s going to be requiring all online retailers to abide by this law.

With states already starting to require online sales tax collection, why the need for federal legislation?

Aside from legal issues regarding state authority over out-of-state businesses (which will have to be resolved either by Congress or in the courts), there’s a very good reason for all retailers to support federal online sales tax legislation: It would make states simplify their sales tax laws.

As Mr. Campbell says in his post:

While it isn’t possible to turn back the clock on online sales tax collection, it is possible to make it easy for sellers to collect sales tax. The Marketplace Fairness Act requires states to simplify and standardize their sales tax laws before they can require any out-of-state seller to collect sales tax. Online retailers in non-sales-tax states should be supporting this legislation: It’s the only way they can make sure that collecting sales tax won’t be too complicated.

Sales tax has always been due on online purchases. Online retailers haven’t had to collect sales tax in the past, but that loophole is about to end, one way or another.

Let’s end it the right way, by making sure states simplify and standardize their sales tax laws.

Poll shows overwhelming support for online sales tax collection

August 16, 2012
US News and World Report

A US News and World Report poll shows overwhelming support for online sales tax collection.

As we blogged about a few days ago, U.S. News and World Report recently hosted an online debate featuring eight arguments for and against online sales tax collection. Readers had the chance to vote on whether they agreed or disagreed with each argument. Now, a week later, we can see what the public thinks of online sales tax collection based on how the votes went.

The result? More than 4 to 1 in favor of online retailers collecting sales tax just like local retailers.

At last check, each of the 3 supporters of online sales tax collection had close to 1,000 votes for and approximately 300 votes against, while the 5 opponents of online sales tax collection had between 750 and 900 votes against them.

See the current tally and vote yourself!

Taxation without representation?

August 16, 2012

Since Senator Jim DeMint’s July 31 op-ed in the Wall Street Journal asserted that online sales tax collection is taxation without representation, we’ve been seeing this argument repeated all over the media. Even thoughtful articles that are trying to look at the topic objectively seem to be taken in by this red herring.

So what’s the truth about online sales tax and taxation without representation?

The three bills currently before Congress that call for online sales tax collection, including the Marketplace Fairness Act, require that that sales tax is destination-based. That means that the sales tax is applied based on where the consumer, not the store, is located. Why? Because consumers are the ones paying the tax, so they should a) get to vote on what the sales tax rate is and b) benefit from the services funded by sales tax.

In other words, if you live in Vermont and make a purchase from an online store located in California, you would pay Vermont sales tax. The store in California would collect the sales tax just as a local store would and remit it back to Vermont, where it would help to pay for police and fire departments, public roads, schools, libraries, and more. And as a resident of Vermont (or any state with sales tax), you have the opportunity to vote on the local sales tax rate and elect the state and local representatives who help administrate sales tax. Which means that destination-based sales tax is taxation with representation, despite what Senator DeMint said.

What’s the other option? Origin-based sales tax. This means that no matter where the customer is located, the sales tax is applied based on where the online store is located. If you live in Vermont and make a purchase from an online store based in California, you’d pay California sales tax that is remitted to California. Where, as a Vermont resident, you have no say in the sales tax rate, cannot vote for state and local representatives, and do not benefit from the services that sales tax helps fund.

In other words, it’s taxation without representation. It’s also, for our money, simply wrong—when you pay sales tax, you should benefit from the roads, schools, parks, and more that it funds.

What a good thing that none of the bills before Congress suggest that origin-based sales tax is the way to go.

So who is supporting origin-based sales tax (taxation without representation)? Ironically, it’s Senator Jim DeMint, along with Adam Thierer, a senior research fellow at the Mercatus Center at George Mason University, and others. Both Senator DeMint and Mr. Thierer have written editorials attacking destination-based sales tax as taxation without representation and proposing that origin-based sales tax is best.

But the facts just don’t hold up.

We’re not saying that there’s no reason to support origin-based sales tax. There is: It’s easier for online shops to apply just one sales tax rate, based on their own location, instead of applying various rates based on their customers’ locations. They also would get to remit all the sales tax on purchases made at their store to their own state, rather than sending it back to the state where the customer, who paid the tax, resides.

But let’s not kid ourselves. Origin-based sales tax is taxation without representation.

Destination-based sales tax—the kind proposed in the Marketplace Fairness Act—is not.

Debate Club takes on online sales tax collection

August 10, 2012
U.S. News and World Report

U.S. News and World Report’s Debate Club tackles online sales tax collection.

U.S. News and World Report‘s Debate Club is taking on online sales tax collection. Here’s the line-up, along with our thoughts on each argument:

Daniel Mitchell, Senior Fellow, the Cato Institute: “States should not be allowed to create a privacy-threatening database of our purchases in order to impose taxes outside their borders.”

We say: Agreed! Thank goodness the Marketplace Fairness Act doesn’t allow any of that to happen.

Sandy Kennedy, President of the Retail Industry Leaders Association: “Tax loophole gives online retailers an unfair loophole over their brick and mortar competitors.”

We say: Agreed. In fact, we don’t think anyone is contesting this point.

Jim DeMint, Republican Senator from South Carolina: “A nationally mandated Internet tax is anything but fair.”

We say: Yep. Fortunately, the Marketplace Fairness Act wouldn’t create a national tax or “tax the Internet” at all. It would let states, if they so choose, require online merchants to collect sales tax on purchases that are already subject to sales tax—purchases made by that state’s residents, who have to pay sales tax on online purchases anyway. Sales tax is paid by residents of the state where the tax is remitted, which means the residents who pay it both benefit from the services that sales tax funds and have the opportunity to vote on the sales tax rate. That’s taxation with representation. And the federal government is not involved in sales tax at all. The U.S. doesn’t have a national sales tax, and the Marketplace Fairness Act wouldn’t create one.

Michael Mazerov, Senior Fellow at the Center on Budget and Policy Priorities: “Internet businesses should live by the same rules as “mom and pop” stores on Main Street.”

We say: That seems fair, as long as allowances are made for the fact that internet businesses may sell to all 50 states and therefore may have more administrative requirements than local stores when it comes to sales tax. States should simplify their sales tax codes to make it easy for internet businesses to collect sales tax. And in fact, the Marketplace Fairness Act requires states to simplify their sales taxes before they can require online sellers to collect.

Steve DelBianco, Executive Director of NetChoice: “States already collect most online sales tax.”

We say: This quote doesn’t really summarize DelBianco’s main argument. We’d have picked this one: “…who’s pushing this idea? Those giant brick-and-click retailers who’d like to raise costs for their rivals.” And actually, we’ve been observing the exact opposite. Small mom-and-pop stores are supporting online sales tax collection wholeheartedly. We recently tweeted about a letter the National Association of Music Merchants sent to Congress; it was signed by 88 state and local trade associations that exist to represent the interests of small business owners. Or look at this op-ed from the St. Louis Post-Dispatch by Dave Overfelt, president of the Missouri Retailers Association, which offers a cogent summary of exactly why local small business owners so strongly support the Marketplace Fairness Act.

This isn’t David vs. Goliath. One group of small business owners wants to preserve an advantage it has over another group of small business owners. DelBianco would have you believe that big retailers like Best Buy and Walmart are trying to crush small online retailers, but the truth is, Best Buy and Walmart really aren’t threatened by small online shops. This is about whether small online shops deserve special treatment that small local shops don’t receive. There are reasonable arguments on both sides of the issue, but the one that says big companies are trying to crush small companies isn’t one of them.

Adam Thierer, Senior Research Fellow for the Mercatus Center at George Mason University: “There are better ways to tax Internet companies while encouraging interstate economic competition.”

We say: Interesting, but irrelevant: Online sales tax collection does not mean taxing Internet companies. They’d be collecting sales tax, not paying it.

But if you read Thierer’s entire piece, it turns out that he’s more concerned a) about the possibility of taxation without representation, b) that collecting sales tax would be too difficult for online sellers, and c) that it would be easier for states to raise sales taxes. He proposes that origin-based sales tax is the best solution.

Let’s take these one by one.

a) Online sales tax collection does not change who pays sales tax to which state. If you live in California, you will only pay California sales tax. If you live in Kansas, you will only pay Kansas sales tax. And so on. You have the chance to vote on sales tax rates in your own state, and you benefit from the services that your sales tax pays for—whether you pay that sales tax at a local shop or an online shop. This is taxation with representation. No state has or will have the ability to collect sales tax from a resident of another state—unless, that is, Thierer’s proposal for origin-based sales tax succeeds. We explain more on that below.

b) The Marketplace Fairness Act says that before a state can require online sellers to collect sales tax, it has to simplify its sales tax laws to make it easy for the seller to do so. And even if you think they’re still not simple enough (are taxes ever simple enough, really?) there are services that will manage all your sales tax needs. Sales tax management services are available for every price point, including “free.” (We happen to like our service, TaxCloud, which is completely free for retailers—but several others are also available.) Just make sure you choose one that has been tested and certified by states, so you’ll be protected in the event of an error.

c) Not sure where the idea that states would have an easier time raising sales taxes comes from. The Marketplace Fairness Act wouldn’t change anything about the way that states determine or change sales tax rates. Those decisions are made by voters and the people they elect to their state legislatures.

Now, on origin-based sales tax. It’s ironic that Thierer says he’s concerned about taxation without representation and then supports origin-based sales tax. It’s the essence of taxation without representation. What “origin-based” really means is “seller-based.” Under this proposal, if you are in Oregon, say, and buy from an online shop located in Vermont, you’d have to pay Vermont sales tax. The sales tax you pay goes to another state, to support the residents of that state. You have no say in what that sales tax rate is or how it is used, and you don’t benefit from the services it funds.

Residents of Oregon, New Hampshire, Montana, Maryland, and Alaska: This means that even though your state doesn’t have sales tax, if you buy online from a store located in another state, you would have to pay sales tax to that state. You won’t benefit from that sales tax, and you won’t have a say in whether it should be raised or not or what services it should fund, but you’ll have to pay it all the same.

It’s hard to believe that anyone really thinks that origin-based sales tax is a good idea. The reason it has the support it does is that it’s easier on sellers—but at the expense of taxpayers. We can’t emphasize this enough: Origin-based sales tax is a really, really bad idea. It’s taxation without representation.

Andrew Moylan, Vice President of Government Affairs for the National Taxpayers Union: “Online sales tax could open a Pandora’s box of overzealous collection efforts.”

We say: This quote isn’t specific, but if you read the full piece, it turns out Moylan is worried that online sales tax collection will open the door for states to tax people outside its borders. Let’s be clear: Proponents of online sales tax collection are suggesting only that states be allowed to collect sales tax from their own residents. No one is suggesting that states be allowed to impose tax on residents of other states, and the Marketplace Fairness Act does not challenge this sensible border.

Neil Niman, Associate Professor of Economics at the University of New Hampshire: “Internet sales tax can do a great deal more economic harm than good.”

We say: A fair concern, though not one we share. If you read Niman’s entire piece, you’ll see that he argues that online sales tax collection would make it “more expensive for out-of-state businesses to gain access to [in-state] citizens.” Actually, it would just make sure that out-of-state sellers have to include the same tax that in-state sellers do. In other words, it would ensure that in-state and out-of-state sellers are playing by the same rules, instead of favoring out-of-state sellers, as the current system does.

It is also worth noting that other economists have reached the opposite conclusion about the effects of online sales tax collection on the economy. As we recently posted, a nonpartisan market research firm has issued a report saying that online sales tax collection may actually help the economy, particularly jobs.

Michael Kercheval, President of the International Council of Shopping Centers: “Online-only retailers are exempt from collecting sales tax at every point of purchase.”

We say: We’re going to blame U.S. News for choosing a quote that doesn’t really summarize the argument. If you read Kercheval’s entire piece, you’ll see that he is primarily concerned with the disadvantage to Main Street retailers, who, he points out, are invested in providing jobs and building local communities in a way that online retailers simply aren’t. It’s a fair point. Right now, for better or worse, our communities are funded by sales tax revenue. We rely on it for fire and police departments, parks, schools, and services for children and the elderly. But if people shop online and online shops don’t collect sales tax, revenue declines and so does funding for these services. What’s more, local shops provide jobs for people in the community—and at a much higher rate than online retailers.

So why continue with a system that favors online retailers at the expense of our communities? Bring it up to date, level the playing field, and let the free market work instead. Local retailers and online retailers should play by the same rules.

Of course, these summaries don’t do justice to the full range of arguments on both sides of the issue, so we suggest you read each piece in full.

But keep in mind the facts about the Marketplace Fairness Act and online sales tax collection:

  • It’s not a new tax.
  • It’s not a tax on the internet.
  • It doesn’t impose a national sales tax. It just gives states the right to enforce their own sales tax laws, if they so choose.
  • It doesn’t require retailers to track or report consumers’ purchases.
  • It doesn’t allow states to impose taxes outside their borders.
  • It doesn’t impose any taxes on online retailers. (States could require them to collect sales tax, not pay it.)

Economic analysis: Online sales tax collection may benefit the economy

August 6, 2012 Research’s report on the Marketplace Fairness Act suggests it could have a positive impact on the economy, particularly retail jobs

The research arm of the live market analysis firm has issued a report on the effects the Marketplace Fairness Act would have on the economy, including both corporate and government perspectives.

We do recommend reading the entire report—it’s a nicely evenhanded analysis that avoids some of the overwrought rhetoric we’ve been hearing lately—but for those of you who just want the highlights, here you go:

Some lobbyists for the online retailers are contending that these new requirements are actually a new consumption tax. That is not necessarily true.

All 45 states that have sales taxes require consumers to collect the tax on online transactions themselves and submit them when filing taxes each year. States, however, lack proper enforcement gauges and audit abilities. Thus, most consumers understate the sales taxes they actually owe.

The benefits to state and local governments and brick-and-mortar retailers should outweigh the decline in consumers’ disposable income.

State and local governments currently have nearly $3.0 tln in outstanding debt. While the recovery of lost tax revenue will not be enough to pay off the debt, it will help prevent more cuts to projects and services until the economy fully recovers.

On the business side, retailers like Best Buy (BBY) will see their prices become more competitive with online retailers. That should boost overall retail sales, increase profits, alleviate pressure to cut payrolls further, and improve hiring conditions.

At the same time, online retailers, like Amazon, generally do not have large workforces or sales staffs. The loss of online sales will lower online retailer profits, but should have few negative effects on overall employment levels.

That means the collection of sales taxes by online companies should result in a net gain in aggregate wages as stronger employment levels at brick-and-mortar establishments more than offset the potential losses from online retailers.

. . .

From an economic perspective, there is little negative impact—and perhaps some positive impact—from an increase in tax revenue and a more level playing field in the retail sector.

From a corporate perspective, the battle is only in the initial stages. As the political story plays out, other online retailers are likely to go the route of Amazon (and eBay) by negotiating regional/state agreements to mitigate the impact of potential tax increases.

At the end of the day, online retailers have gotten away with not paying/collecting taxes. Eventually, that will come to an end.

Response to Senator DeMint’s WSJ op-ed on internet sales tax

August 3, 2012

Los Angeles Times: Online sales taxes [are] not taxation without representation

Los Angeles Times: Online sales taxes [are] not taxation without representation.
RILA responds to Senator DeMint’s WSJ op-ed
NRF sends a letter to senators Enzi, Durbin, and Alexander—the three main sponsors of the bill—rebutting Senator DeMint’s assertions

We had planned to respond to and correct the inaccuracies in Senator Jim DeMint’s recent Wall Street Journal op-ed on the Marketplace Fairness Act, but the Los Angeles Times, the Retail Industry Leaders Association (RILA), and the National Retail Federation (NRF) all beat us to the punch.

The first to respond was the Los Angeles Times, which emphasized that collecting sales tax online is not taxation without representation—in fact, as we discuss below in more detail, the origin-based sales tax Senator DeMint supports would actually create taxation without representation, not prevent it. The system proposed by the bill keeps power in the hands of the states and their residents.

Then, RILA released a press release that itemizes nearly every statement in the op-ed and offers either a correction (there were a lot of misleading or false statements in the piece) or a differing viewpoint for each.

For its part, the NRF sent a letter to senators Enzi, Durbin, and Alexander—the three main sponsors of the bill—rebutting Senator DeMint’s assertions.

We recommend reading all three responses, but here are some of the most important points to take away:

1. Sales tax is already due on online purchases.

2. The Marketplace Fairness Act would not require online retailers to “pay sales tax” (in their own state or any other). It would end a loophole that lets online retailers avoid collecting sales tax from their customers. That sales tax is due to the state where the customer lives (and presumably votes), and it pays for roads, fire and police departments, schools, and other public services. It is not taxation without representation, any more than the sales tax you pay at your local drugstore is.

3. By allowing states to require online sellers to collect sales tax, the bill would level the playing field for all retailers. The federal government shouldn’t pick retail winners and losers, as it does when it says online retailers don’t have to collect sales tax.

4. The bill doesn’t create a national sales tax or tax online access or online shopping. It actually gives power back to the states, who would get to decide for themselves whether and how sales tax is applied.

5. The bill doesn’t raise taxes. It just gives states the power to enforce their own sales tax laws. States retain the authority to determine sales tax rates, which apply only to goods sold within the state.

6. Senator DeMint supports an origin-based sales tax. “Origin-based sales tax” means that the sales tax rate where the seller is located is applied to the purchase, and it currently only applies within a state’s borders. Essentially, a state can say that if both seller and buyer are located within the state but in two different tax jurisdictions, the seller’s sales tax rate applies—and the sales tax the buyer pays is sent to the seller’s location.

Imagine if this were applied nationally. The very thing Senator DeMint fears would come true: taxation without representation.

Because under that system, if I live in California and buy something from a seller who’s in New York, I have to pay sales tax to the State of New York, where I do not live or vote and where my tax money would go to pay for things I do not benefit from or use—and I’d have no say in how New York used my money. It’s the very definition of taxation without representation.

Senator DeMint is right that taxation without representation is a terrible idea, that the “nexus among Americans, their taxes, and their votes must remain as tight as possible. It is the essence of our democracy.” Unfortunately he’s completely wrong about how to make sure you get to vote on how your sales tax dollars are spent.

Sales tax must be (and, in most states, is) destination-based—it must be applied to the state and region where the person paying the tax lives, to ensure the person paying the tax has a say in how that tax money is spent and benefits from the public goods that tax money provides.

The Los Angeles Times article, the RILA press release, and the NRF letter make other good points, too. Take a look.

Small business owners quoted by Alliance for Main Street Fairness — including our CEO

August 1, 2012

We were excited to see FedTax’s CEO, David Campbell, quoted alongside two other business owners in a press release from the Alliance for Main Street Fairness.

The article includes quotes from Pete Sides, co-owner of Robert M. Sides Family Music Center in Williamsport, PA, and Steve Bercu, co-owner of BookPeople in Austin, TX, both of whom support online sales tax collection—and whose small businesses both collect and remit sales tax, proving just how easy it is. Said Steve Bercu, who also testified in today’s hearing before the Senate Commerce Committee:

Remitting sales tax from out-of-state customers is not that hard, and those perpetuating the myth that it’s wildly complicated and costly are simply trying to preserve the special treatment in the tax code they currently enjoy. Congress should level the playing field and let us all compete on price in a free market.

We’re proud to be making online sales tax collection easier and cheaper (free) for businesses big and small. Here’s what our CEO had to say to the Alliance for Main Street Fairness:

Today, keeping track of a few thousand local tax rates and filing requirements is not an insurmountable technical, administrative or financial burden. TaxCloud proves this point by calculating and collecting sales tax on any purchase for any tax jurisdiction in the United States in less than one second. The service is free to all retailers.

It’s great to see business owners speaking up for marketplace fairness and recognizing the role that TaxCloud and other sales tax management services play in making the playing field level for everyone.

We will post again on our report from the hearing floor.

Study shows 86% of consumers prefer point-of-purchase sales tax collection online

May 15, 2012

International Council of Shopping CentersAccording to a press release issued yesterday, a study by the International Council of Shopping Centers shows that the vast majority of consumers—86%!—say that “it would be far easier to pay sales tax on online purchases at the point-of-purchase.” That’s compared to the current system, which requires consumers to track their online spending, calculate the sales tax due, and pay that sales tax with their income tax returns.

(For those still uncertain about whether sales tax is already due on online purchases: It is. You can learn more here.)

Among the revealing and fascinating results of the study are these tidbits:

86% of consumers feel it would be easier to pay sales tax on online purchases at the point-of-purchase rather than at the end-of-the-year on their tax forms, as is the current system.

61% of respondents in states that collect sales tax understand that they are required to pay state sales or use tax on online purchases if not collected by the vendor when they file their state income tax.

56% of consumers support the congressional effort to require online retailers to collect sales tax at the point-of-purchase.

We couldn’t agree more with the majority of respondents, especially having recently struggled with that “sales tax on online purchases” line on our tax returns. The system needs to change. Sales tax should be collected at the point of purchase online, just as it is on Main Street.

And we were excited to see that a full 56% of respondents support federal legislation on the issue. That’s a number that Congress should find difficult to ignore—especially when combined with all the feedback from state politicians who are letting their federal counterparts now just how much they need a national law (Idaho Governor C.L. “Butch” Otter, Tennessee Governor Bill Haslam, Maine Governor Paul LePage, and many more).

The ICSC also supports federal legislation, as do we. The voices are getting louder: It’s time for Congress to act.

US online retail continues 17% to 20% year-over-year growth!

May 11, 2012

Today turned out to be an unusually interesting day for three reasons.

First, the U.S. Census Bureau released its latest E-Stats Report for FYE 2010 today, which revealed that online retail reached $169 billion for all of 2010. The Census Bureau data point does not include online auctions or marketplaces. If you add in eBay’s 2010 U.S. Gross Merchandise Volume (GMV) of $20.4 billion, total online retail could be estimated at approximately $190 billion for FYE 2010. The E-Stats Report also includes preliminary estimates for online retail in 2011 of approximately $194.3 billion. Once again, if you add eBay’s 2011 GMV of $22.8 billion, total online retail could be estimated at approximately $217 billion for FYE 2011.

Second, today comScore released Q1 online retail statistics, which say that online spending in the U.S. reached $44.3 billion (excluding auctions), an increase of 17% over last year. Interestingly, comScore will be hosting a free webinar to review their data in detail—including recent trends toward “showrooming” (in which a buyer goes to a bricks-and-mortar store to compare different items, then leaves the store and purchases online to avoid sales tax).

Finally, today Internet Retailer released their annual Top 500 Guide. As usual, Amazon tops the list with $48 billion in sales.

An interesting data point in the annual ranking includes the dramatic range in revenue from the top of the list to the bottom. At number 500 is Summit Sports with just under $15 million (0.00024% of eBay’s sales volume).

We have always thought it notable that eBay is not included in this list. We understand that as a marketplace operator, they are not the direct retailer; rather, they aggregate millions of sellers under one roof. However, if eBay were included on the list, based upon only their marketplace and GSI business units (excluding PayPal), they would beat even Amazon with $62 billion in GMV in 2011 (worldwide).

Here’s an interesting observation about the census and Internet Retailer data. The total online commerce represented in the Top 500 list—which, you’ll remember, ends with a retailer that had just under $15 million in sales in 2011—was $150 billion in 2010. However, the census data reports $190 billion for 2010. That year, the retailer at the bottom of the Top 500 list was MagnetStreet with $11 million. Since the census figure includes all retailers while the Top 500 figure includes only retailers with more than $11 million in annual sales in 2011, we now know how much businesses with less than $11 million in annual sales generated together in 2010.

In other words, because it didn’t count businesses with less than $11 million in annual sales in 2010, the Top 500 list only accounted for $150 billion in total ecommerce sales in 2010 instead of $190 billion.

That’s $40 billion in ecommerce being transacted by merchants with less than $11 million in annual sales! It’s also important to remember that the IR Top 500 Guide is not restricted to US sales but includes all sales worldwide. So there could be considerably more than $40 billion in ecommerce that’s still under the radar.

There are a lot of conclusions that could be drawn from this, but we’ll save those discussions for another post at a later date.

New study about online sales tax asks the wrong questions

May 9, 2012

According to this article in The Atlantic, a new study by “Stanford researchers” tries to take a look at the effects that sales tax would have on online shopping.

The problem is, they they don’t take into account that sales tax is already due on online purchases—a point derided in the study as “tax surprises.”

The study, “out this week on the National Bureau of Economic Research, looks at how sensitive online retail is to tax changes by tracking the behavior of eBay users.” It doesn’t include real estate and auto transactions.

The study concludes that “a one percentage point increase in a state’’s sales tax increases online purchases by state residents by just under two percent, but decreases their online purchases from home-state retailers by 3-4 percent.”

But the same sales tax you pay locally is already due online. Nobody is suggesting raising sales taxes, online or otherwise—certainly not differentially. So what does this study really tell us about online sales tax collection?

Not much. It doesn’t take a team of economists to tell us that an increase in sales tax rates causes a decrease in sales, at least temporarily. Thank goodness raising sales tax rates isn’t on the table.

What we still don’t know is how online sales tax collection—having retailers collect the sales tax that is already due on online purchases, so individuals don’t have to calculate and remit it themselves—would affect online shopping. It’s too bad the researchers didn’t look at that question. But the Atlantic article ventures a guess:
Many shoppers aren’t just moving to the web because of price, but for convenience. All other things equal, it’s their default choice. And as that attitude becomes more prevalent, the impact of a sales tax could diminish.So would a sales tax put a crimp in online retail? Quite possibly. But it’s hard to believe it would be anything but temporary. (emphasis ours)

We were also very curious about how the team got the eBay data they used for the study. As our regular readers know, eBay is on record as opposing online sales tax collection—is it possible that they sponsored or otherwise supported the study in the hopes that it would add fuel to their argument?

After several days of consideration, this important question burned brighter and brighter, so we gave in and bought our own copy of the 42-page study (for $5.00, and no, they didn’t charge sales tax—see picture—and yes, e-books are subject to sales tax in the State of Washington. Mental note: Don’t forget to report and remit $0.48 to the Washington Department of Revenue because the online seller refuses to do this for me like every local store must.)

The paper is very upfront about pointing out potential conflicts of interest. One of the four authors, Neel Sundaresan, is Senior Director for eBay Research Labs and is employed by eBay. Another of the authors is Professor Jonathan D. Levin, Chair of the Department of Economics at Stanford University, who was a paid consultant to eBay Research Labs in 2010 and 2011.

Don’t misunderstand the point of our post—we would love to see a study that truly looks at the actual effects of online sales tax collection on online shopping. Unfortunately, this isn’t it.

We also wish the team had taken a moment to report on two very basic questions:

  1. Out of all the transactions data they had access to (all transactions from 2008 to 2010), how many transactions included sales tax?
  2. Out of all the sellers represented in the transaction data, how many sellers conducted more than 200 transactions or had over $20,000 in sales in each of the three years? Similarly, how many sellers exceeded $50,000 in sales in each of the three years? Finally, how many sellers exceeded $150,000 or $500,000 in sales in each of the three years?

Given the intensity of debate around this issue at the local, state, and federal level—particularly around these two points—it is unfortunate that the researchers missed (or avoided) the opportunity to provide such insight.

Bellas Hess, Quill, and online sales tax collection

April 25, 2012

As you’ve likely noticed, there has been quite a bit of news lately about online sales tax collection. In the media coverage of this issue, we’ve frequently seen glancing references to the Supreme Court cases Quill or Bellas Hess—but rarely an actual explanation of how they affect consumers, retailers, and states, let alone what exactly those rulings say.

On this occasion, the eve before the Senate Finance Committee Hearing “Tax Reform: What It Means for State and Local Tax and Fiscal Policy” (where we expect the Marketplace Fairness Act to be discussed at length) we thought it might be helpful to give a brief review of these two landmark Supreme Court cases.

This post is not a scholarly analysis of the (dormant) Commerce Clause, or due process concerns, or states sovereignty and federalism—such analyses are amply handled by greater legal/constitutional minds than ours. Rather, this post is intended as a primer for business leaders, so they can understand why these rulings are important and why the logic underlying them is so out-of-date—warranting attention and action by Congress.

Bellas Hess refers to the 1967 Supreme Court case National Bellas Hess v. Department of Revenue of Illinois. Illinois’s Department of Revenue attempted to force catalog retailer Bellas Hess, which was based in Kansas City, to collect Illinois sales tax. Bellas Hess refused, and the case went all the way to the Supreme Court.

In its ruling, the Supreme Court said that only businesses with nexus in a state have to collect sales tax for that state. Nexus is created by a physical presence, though opinions on what constitutes a physical presence vary. It can be a warehouse, office, retail location, employees, or even vehicles. Some states have argued that having business affiliates in a state creates nexus there.

In any case, the Supreme Court specified that businesses had to have nexus in a state to collect sales tax there because it would be too burdensome for a business located in one state to collect sales tax for another state (possibly every state). Specifically, Justice Potter Stewart wrote in the majority opinion:

The many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National [Bellas Hess]’s interstate business in a virtual welter of complicated obligations to local jurisdictions.

(emphasis ours)

Interestingly, in the dissenting opinion, Justice Abraham Fortas wrote that “the Court’s response that these administrative and record keeping requirements could ‘entangle’ appellant’s interstate business in a welter of complicated obligations vastly underestimates the skill of contemporary man and his machines.” We couldn’t agree more—and it’s even more true now, in 2012, than in 1967. We know that technology is able to handle multistate sales tax because we’ve built a service that does so: TaxCloud.

The Bellas Hess ruling went on to say that an act of Congress was necessary to give states the ability to require out-of-state businesses to collect sales tax. Without an act of Congress, the Supreme Court ruling was the ultimate authority on what states could and could not do.

In 1992, the issue of out-of-state sales tax collection arose again. North Dakota tried to require Quill Corporation, a mail-order office supply company incorporated in Delaware, to collect tax on its sales into the state. Quill refused on the grounds that it had no physical operations or employees in North Dakota.

The Supreme Court sided with Quill, citing the previous ruling in Bellas Hess and stating that customers alone (in other words, an economic presence) weren’t enough to create nexus.

However, in the Quill ruling, the Supreme Court specifically invited Congress to exercise its authority to overrule the Supreme Court by enacting legislation:

[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions. See Prudential Insurance Co. v.Benjamin328 U.S. 408 (1946). Indeed, in recent years Congress has considered legislation that would “overrule” the Bellas Hess rule. Its decision not to take action in this direction may, of course, have been dictated by respect for our holding in Bellas Hess that the Due Process Clause prohibits States from imposing such taxes, but today we have put that problem to rest. Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.

Indeed, even if we were convinced that Bellas Hess was inconsistent with our Commerce Clause jurisprudence, “this very fact [might] giv[e us] pause and counse[l] withholding our hand, at least for now. Congress has the power to protect interstate commerce from intolerable or even undesirable burdens.” Commonwealth Edison Co. v. Montana453 U.S. 609, 637 (1981) (White, J., concurring). In this situation, it may be that “the better part of both wisdom and valor is to respect the judgment of the other branches of the Government.”Id., at 638.

(emphasis ours)

In other words, the Supreme Court left the issue up to Congress.

To sum up: The Supreme Court rulings in Bellas Hess (1967) and Quill (1992) determined that a business needs to have a physical presence in a state in order for the state to require the business to collect sales tax. What constitutes a physical presence is still a matter of debate, however.

The Supreme Court also made it clear that Congress has the power to pass legislation changing the outcome of the Supreme Court rulings. And because the Court based its decisions on the idea that collecting sales tax would be too burdensome for remote retailers, an idea that technology has rendered moot, it’s critically important that Congress do so.

We hope Congress will learn enough tomorrow to pass the Marketplace Fairness Act quickly to correct the devastating imbalance impacting retailers, consumers, and local governments across the country.

eBay relaxing opposition to the Marketplace Fairness Act?

March 29, 2012

It all started when Maine’s Governor Paul LePage sent a letter to Maine’s Senators Snow and Collins, urging them to support the Marketplace Fairness Act (S.1832).

Then, we learned (from an article by Jonathan Riskind, Washington Bureau Chief for MaineToday Media) that eBay had written a response letter to Governor LePage. Yesterday, eBay announced/confirmed this letter.

We are happy to note that eBay did not write in opposition to the Marketplace Fairness Act but instead simply confirmed that small business retailers should be adequately protected from new burdens (which is already provided for in the bill).

We have taken a moment to review eBay’s letter carefully and noticed something odd. Mr. Riskind’s article cites the eBay letter:

eBay notes there are a variety of internet sales tax bills pending in Congress and says it supports a “robust” exemption set by the U.S. Small Business Administration, which will “be able to most accurately measure which businesses need protection the most.”

We could not find this quote in eBay’s Letter.

We also wrote a letter to Governor LePage regarding his support of the Marketplace Fairness Act and eBay’s reported objections to it, which we sent yesterday (before eBay released their letter).