eBay and the small business exception

April 22, 2013

In an email Sunday to 40 million eBay users, eBay CEO John Donahoe urged them to oppose the Marketplace Fairness Act unless the small business exception, which exempts online retailers with less than $1 million in out-of-state sales from collecting sales tax, is raised to $10 million or 50 employees.

We’re all for making sure small online businesses don’t have to spend time or money dealing with sales tax (that’s why we created TaxCloud in the first place), but here are three reasons that raising the exemption threshold doesn’t make sense:

1. At the $1 million threshold, most online retailers are already exempt. Nationwide, fewer than 1000 online retailers* have more than $1 million in total sales. (If we consider only out-of-state sales, that figure is even lower.)

2. Collecting sales tax doesn’t require the resources of a large company. The Marketplace Fairness Act requires states to provide free sales tax software and services for online retailers, so online businesses wouldn’t need to spend anything to comply with the bill.

3. Most small online retailers already use e-commerce platforms, which can easily provide add-ons that handle sales tax, just as they provide for shipping—making sales tax collection easy for all their retailers at once. And we’d lay odds that once states can require online businesses to collect sales tax, that’s exactly what they’ll do.

By exempting online retailers with less than $1 million in out-of-state sales, the small business exception already does what it was designed to do: ensure that small online businesses are not burdened by online sales tax collection. But raising the exemption threshold to $10 million or 50 employees would be a mistake.

*According to Internet Retailer‘s Second 500 Guide, only the top 980 online retailers in the nation had over $1 million in sales in 2011.

Colorado’s online sales tax reporting requirements law finally killed

April 7, 2012

A federal judge has finally issued a permanent injunction on Colorado’s 2010 online sales tax reporting requirements law, which called for all online retailers to report purchases made by Colorado residents to the state’s Department of Revenue. A temporary injunction against the law was issued last year just before the reporting requirements would have gone into effect.

In his ruling, Judge Robert E. Blackburn looks at the precedent set by the 1992 Supreme Court case Quill v. North Dakota, which mandated that out-of-state retailers did not have to collect sales tax even as it recommended that Congress address the issue—which, of course, it has yet to do.

Blackburn writes:

Quill puts states like Colorado in a difficult position. The state cannot require out-of-state retailers, retailers with no physical presence in the state, to collect and remit sales tax on sales those retailers make to residents of Colorado. Residents who make purchases from those retailers are obligated to pay use tax on those purchases, but enforcing the use tax is significantly more difficult than enforcing the sales tax. Seeking to enhance enforcement of the use tax on those who make purchases from out-of-state retailers, a state understandably looks to the out-of-state retailers for key information that can enhance enforcement. However, if the state has a mandatory sales tax system, as does Colorado, enforcing a reporting requirement on out-of-state retailers will, by definition, discriminate against the out-of-state retailers by imposing unique burdens on those retailers. Such a system imposes a differential burden on out-of-state retailers because the different burden is imposed precisely because the retailer is an out-of-state retailer entitled to the protection of Quill. Quill creates the in-state versus out-of-state distinction, and the dormant Commerce Clause prohibits differential treatment based on that distinction. Only a change in the law by the Supreme Court or action by Congress can change this situation. Quill, 504 U.S. at 318 (“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.”) (emphasis ours)

It’s worth repeating: “Only a change in the law by the Supreme Court or action by Congress can change this situation.”

Our readers may be surprised, given our support of states’ efforts for online sales tax collection in general, that we agree with Judge Blackburn—on his overall ruling, the fact that Quill makes the current situation difficult for states, and his assertion that only federal action, not state, can remedy the situation.

State after state has tried to increase the collection of sales tax on online purchases, but only a federal law, like the Marketplace Fairness Act, can overcome the limits set by Quill—or, more precisely, can exercise the interstate commerce authority reserved for Congress via the (dormant) Commerce Clause.

One other interesting point: Colorado doesn’t include a line on its income tax return form for reporting and remitting sales tax on online purchases. The reason given? That “the amount of tax collected did not justify the printing expense.” We have to think that, while that may have been true in 1974, it wouldn’t be true anymore, and it does seem like a reasonable measure to impose until Congress acts on online sales tax collection.

But the inclusion of this fact in the ruling leads us to another question. The ruling says that “there are at least three reasonable nondiscriminatory alternatives” to reporting requirements that could also increase the collection of sales tax on online purchases: the line on income tax returns, increased auditing of businesses, and consumer education and notification programs aimed at increasing compliance.

What about the other states that have already implemented these, that include the line on income tax returns, have increased business audits, and created consumer education programs—and still have not seen satisfactory compliance with its sales tax laws? Would these states be permitted to implement reporting requirements?

Other ideas in the ruling make us think not, but better legal minds than ours may be tempted to try. We still oppose reporting requirements, primarily because they are an invasion of consumer privacy, but we wouldn’t be surprised if another state, fed up with lack of action by Congress, decides to try this approach.

The best course of action, as we have been arguing for a long time, is for Congress to pass federal legislation allowing states to require online retailers to collect sales tax, for many good reasons.

Debunking another online sales tax myth

October 28, 2011

We’ve started seeing a new line of argument against online sales tax collection in many articles and editorials. It goes something like this:

“An online store shouldn’t have to collect sales tax for a state it doesn’t have a physical presence in because it doesn’t benefit from any of the things sales tax pays for, like firefighters and police. If a store is located in California, why should it collect New York sales tax when that sales tax goes to pay for projects and services in New York?”

This argument would make sense if the online store were paying, not collecting, sales tax. But that’s not the case. It’s the store’s customers who are paying sales tax, and they do benefit from the firefighters, police, libraries, and more that sales tax revenue helps pay for.

Online stores pay taxes wherever they’re located to help pay for the services that their offices benefit from. All that has absolutely nothing to do with whether or not they collect sales tax. Collecting sales tax is—or rather should be—simply part of selling online, just as it’s part of selling on Main Street.

To sum up: The sales tax you pay funds projects and services in your community. That’s as it should be. Collecting sales tax? That’s just part of doing business.

Small business owner makes argument for online sales tax collection in NY Times

October 27, 2011
The New York Times: Small Business: "You're the Boss"

New York Times: Occupy Wall Street? Who Will Occupy Main Street?

There’s a terrific new post up on the New York Times‘ “You’re the Boss” blog. Written by Jay Goltz, a small business owner from Chicago, it makes a great argument for online sales tax collection.

We strongly urge you to read the entire post yourself, but we couldn’t help quoting from parts of it:

On browsing in local stores but buying online:

I have a friend who owns a shoe store, and he tells me that people come in all of the time, try on some shoes, spend half an hour with a member of the sales staff, and when they have made a choice they announce that they are going to order the shoes online — as if it is something to boast about. Boasting to your friends is one thing; boasting to someone who has just spent time trying to help you is rude at best. 

On the ultimate consequences of browsing locally but buying online:

What happens if your local retail stores become a showroom for online stores to such an extent that it forces them out of business? Are you perfectly happy not touching and trying out products? It has already happened with the closing of hundreds of Borders book stores. This is not a level playing field — and I say this as someone who has both retail outlets and substantial online sales.

It’s also happened with several Barnes and Noble locations. When one Manhattan location closed last year, the New York Times interviewed several browsers at the store, and most said they liked to visit the store but didn’t buy anything. They preferred to buy online.

On how the loss of sales tax revenues hurts communities:

Zappos does about $1 billion in sales every year. If Chicago represents 2 percent of the company’s business, that would be $20 million in annual sales. That represents about $2 million dollars of sales tax that the city no longer gets — and no longer gets to use to pay for police, firefighters, teachers and street repairs . . . . How much more is being lost on sales by Amazon (which owns Zappos) and all of the other online retailers?

The loss of sales tax, as well as the loss of the real estate and payroll taxes that those closed stores used to pay, is damaging your city and state. This is a zero-sum game. You may think that if a local store can’t compete with Zappos or Amazon, that’s the store’s problem. And you may be right. But why do the rules favor Zappos and Amazon? Not forcing them to collect sales tax has given them an unfair advantage that ultimately will force all of us to pay higher taxes to local governments.

On local stores and the community:

Saving money online can be a pleasure. But these local stores employ your friends and neighbors, spend millions of dollars in your community, and are hardly taking advantage of anyone. . . . Whether it is the local frame shop, furniture store, luggage store, florist, shoe store, bicycle shop, or eyeglass store, many are struggling. If they are doing well, they are not doing that well. Most stores are not ripping people off. They are trying to make a living, give service, support employees and pay taxes — and they are getting challenged by large companies that can buy cheaper but don’t necessarily provide better value.

This is a fantastic post, and we highly recommend that you head over to the New York Times and read the entire thing.

Misinformation in the press

April 15, 2011

A recent article in the Hawaii Reporter on proposed tax changes in Hawaii includes some misleading language about online sales tax that we’ve been seeing in many press outlets.

We don’t mean to finger the Hawaii Reporter specifically—many, many newspapers and blogs have contained this kind of misinformation. The Hawaii Reporter just happens to be the one we saw this morning when we decided to finally address the issue.

And it turns out that this particular article is a good example, because several of the most common incorrect or misleading “facts” appear in a single paragraph:

One tax that will likely pass is the Internet purchase sales tax. Right now there are two federal legal rulings opposing attempts to tax businesses that don’t have a physical presence in the state (see comment section below for more details). That is under the theory that the businesses don’t have to pay taxes for government infrastructure improvements and services that they will never use.

1. No one is proposing a tax for businesses, online or off. (In fact, no one is proposing a new tax at all, but we’ll get to that.) Online retailers would simply be collecting the sales tax that consumers pay—a tax that, right now, consumers are expected to calculate and send to their state directly (although few do). The anticipated legislation would shift that burden from consumers to retailers.

2. Sales tax is destination-based, which means that it goes to the state where the consumer (who pays the tax; see #1) is located. Which makes sense, because sales tax pays for vital community services and infrastructure—and those who pay the tax are those who benefit from those services and infrastructure.

3. The reason that the Supreme Court ruled that retailers are required to collect sales tax only for states where they have a physical presence, or “nexus,” was not that the court wanted to ensure that the retailer didn’t have to collect taxes for places where they didn’t benefit from government services and infrastructure. It was because the court felt, in 1967, that requiring retailers to collect sales tax for every state they sold in would be too difficult—there are thousands of tax jurisdictions throughout the country, and at the time it would have been too hard for a retailer to keep track of the sales tax rate in every jurisdiction.

The good news is, all that has changed in the forty-four years since the Supreme Court ruling. Today, technology makes it easy for retailers to instantly calculate the sales tax due for any location in the country. It’s no more difficult than calculating shipping rates in real-time, something that nearly every online retailer does. What’s more, sales tax management services like TaxCloud handle every aspect of sales tax collection for the retailer, at no cost. TaxCloud not only calculates the sales tax due, it also files tax returns, generates monthly state-by-state reports, handles audits and exemptions, and more. With services like that, calculating and collecting online sales tax could hardly be easier.

4. No one is proposing a new “Internet purchase sales tax.” Sales tax is already due on online purchases; if the retailer doesn’t collect it, the consumer is supposed to calculate the tax due and send it directly to their state with his or her tax returns. What the legislation would do is shift that burden from consumers to retailers.

It’s strange that so many press outlets are getting these facts wrong. We hope that as the issue gets more and more publicity, journalists become more familiar with it and can address its nuances without including incorrect information.

Reuters on affiliate nexus laws, Main Street Fairness

March 17, 2011
Reuters: States, business watch for effects of Illinois tax

Reuters: States, business watch for effects of Illinois tax

Illinois’ passage of affiliate nexus legislation has inspired another article on online sales tax, this time by Reuters: “States, business watch for effects of Illinois tax.”

The article offers a succinct background of affiliate nexus legislation and the Streamlined Sales Tax initiative, as well as the effect of affiliate nexus laws on states’ budget shortfalls.

But near the end of the article, we once again see that hoary old argument: Collecting sales tax online is too complicated for online retailers. This time, the partner of an accounting firm is quoted as saying that

asking Amazon to collect taxes would create an administrative nightmare because the company has “thousands and thousands of transactions everyday all over the country.”

Leaving aside the irony of the idea that a company that offers millions of items for sale can’t keep track of the nation’s sales tax rates, we are pleased to offer a solution: TaxCloud.

TaxCloud is a comprehensive sales tax management service that calculates the sales tax due on any purchase for any address in the U.S. It’s easy to set up and integrates with any shopping cart system. TaxCloud monitors the tax codes of every tax jurisdiction in the country and automatically updates any changes, so every TaxCloud merchant is always compliant with state tax laws. It also generates detailed reports and creates state-by-state tax returns for TaxCloud merchants. And best of all, TaxCloud is free to retailers.

Can we please put this argument to rest? Collecting sales tax for every tax jurisdiction in the country is not too difficult, not for Amazon or even the smallest sole-proprietor online shop. TaxCloud can manage the calculation, collection, and remittance of sales tax for any retailer of any size.

And that means that opponents of the Main Street Fairness Act will need to find a new argument. When collecting online sales tax is easy to do, fair to local retailers and online retailers, and helps prevent cuts in vital community services—why wouldn’t everyone support it?

Blog Response: PC Mag’s Dvorak is wrong.

August 16, 2010

We couldn’t agree more with this response to PC Mag’s editorial blog post last week. American Programmers Independent wrote this brief commentary response to John C. Dvorak’s mis-characterization of  HR 5660.

We too have been longtime fans of Mr. Dvorak’s work, and were disappointed by his clear lack of understanding (or even any basic attempt at understanding) this matter.  As an editorial, we understand and respect that it is merely his opinion, but we expect more journalistic integrity from the Ziff Davis editorial board.

Our attempts at outreach to Mr. Dvorak and PC Magazine since this editorial was published have not been responded to.