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.


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.


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).


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.


California is on fire (for sales tax)!

June 2, 2011

Earlier today the California Assembly passed AB 153, the so-called “affiliate nexus” legislation. This development comes on the immediate heels of the Assembly’s approval yesterday of AB 155.

To review:

AB 153 would require any out-of-state retailer to collect California sales tax if that retailer pays click-through commissions  to any California business in excess of  $10,000 $500,000  annually (note: revised upward 3 days ago). AB 153, if approved by the State Senate and signed by Governor Brown, will mandate that any website link advertisement (where compensation is paid if a sale is completed) is the legal equivalent to a door-to-door salesperson—invoking the sales tax collection obligation provisions of the Supreme Court’s 1992 Quill decision.

As many of our regular readers know, many web-based businesses regularly display commission-bearing advertisements on their websites. Perhaps more troubling than the typical “Amazon.com” affiliate relationships that have been in the news so much lately, consider the possible impact of this legislation on California companies, such as eBay. EBay’s entire business is based upon receiving a commission upon completed sales. If AB 153 becomes law, potentially every eBay seller could be required to collect California sales tax if they sell (or even market) any products to just one California resident. We expect this may explain the sudden huge jump in the “occasional sales” exception threshold.

Seriously though?! Is $500,000 annually really an “occasional seller“? That must be one heck of a garage sale!

Meanwhile, AB 155 is now focused entirely on mandating that so-called “sister companies” based in California establish sufficient nexus for out-of-state “parent” or “sibling” companies to be required to collect California sales tax. Our regular readers may recall that AB 155 was initially introduced as reporting requirement bill, very similar to Colorado’s legally embroiled reporting requirement law, HB 1193. Fortunately AB 155 has been amended several times since then to eliminate the more troublesome reporting obligations and achieve its new form. Although, as it is worded now, it would seem quite likely to cause affected out-of-state retailers with investments in California businesses to simply withdraw those related entities from the state entirely. While we are sure there are numerous examples of such entities, Lab126 (the developer of the Kindle for Amazon) comes immediately to mind.

While we appreciate and respect California’s need to fix the current imbalance related to sales tax collection obligations, which costs the state over $1.1 billion annually, we sincerely hope those entrusted to do the people’s work in Sacramento recognize that this matter must ultimately be resolved in Washington DC.

Under the Supreme Court’s 1967 National Bellas Hess vs. Illinois Department of Revenue ruling, the ability of states to compel remote or out-of-state businesses to collect local sales tax hinges on minimizing (or eliminating) burdens implied by such an obligation. In its majority opinion (now forty-four years ago), the Court ruled that

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

So, unless and until California directly addresses these three points of undue burden, attempts to compel remote retailers to collect will not likely survive litigation and judicial review.

Fortunately, California has been working with 43 other states on the Streamlined Sales and Use Tax Agreement since 2000 —a system that alleviates all of these burdens (and is FREE for retailers to implement). Governor Brown and the California legislature should urge California’s delegation in Congress to sponsor and work to pass the federal Main Street Fairness Act, which would eliminate the need for California to venture into such controversial interpretations and extensions of the concepts of nexus and would finally enable California to require out-of-state retailers to collect sales tax, just as any local retailer is required to do.


Friend of Bill (Delahunt)

July 29, 2010

There was a press conference in Washington DC today about The Main Street Fairness Act, a bill introduced by Congressman Bill Delahunt (D-MA) on July 1, 2010. The bill aims to help states retrieve billions of lost sales tax revenues that are currently owed but go uncollected on remote (online and catalog) sales. Rep. Delahunt was joined by South Dakota Governor Mike Rounds (R-SD), Former Speaker of the Iowa House of Representatives Chris Rants (R-IA), state leaders and small business owners.  Here is the Press Release on Rep. Delahunt’s website.  Coverage of the press conference is included in this Washington Post Article.

FedTax.net CEO R. David L. Campbell was on hand to show support for the MSFA bill, and to respond to questions about whether sales tax calculation and collection can be done without causing a burden on retailers.  The answer is an emphatic ‘YES’ .  TaxCloud is our free, easy-to-use sales tax calculation and remittance service for retailers. It’s the only service created solely to comply with the Streamlined Sales and Use Tax Agreement (SSUTA) at a scale to support all internet merchants.

Here’s a picture of David with Representative Bill Delahunt.