Small sellers: What does $1 million in sales look like?

March 19, 2013

There has been a lot of talk lately about the “small seller exception” in the Marketplace Fairness Act, which was introduced last month. The bill says that small sellers don’t have to collect sales tax on online purchases, and it defines “small seller” as a merchant with less than $1 million in annual remote sales.

Some opponents say this threshold is still too low, though—that a seller with $1 million in annual remote sales is too small to handle sales tax.

So, what does a seller making $1 million in remote sales look like? Here a few examples.

Bottled Water

You wold have to sell 166,000 cases of water per yearLet’s say an online retailer is selling 0.5-liter bottles of water in cases of 24. At $6 per case, $1 million is equal to 166,667 cases of bottled water, enough to fill 125 fifty-three-foot tractor-trailer trucks.* That means that if you were selling $1 million worth of bottled water in a year to out-of-state buyers, then you would shipping out an entire truck of full of bottled water approximately every three days.

125 trucks

Shoes

ShoesAssuming the average price of shoes is $50 per pair, $1 million is equal to 20,000 pairs of shoes. To make $1 million selling shoes in one year to out-of-state buyers, you’d need to sell about 55 pairs of shoes per day, every day, for an entire year.55 Pairs of Shoes sold each day

Digital Goods

Angry Birds Star Wars AppMany apps go for about $1 each, so to earn $1 million selling apps, you need to sell at least 1 million apps. To sell 1 million apps in a single year, you’d have to sell 2,739 per day to out-of-state buyers, or slightly less than 2 per minute, every minute, for an entire year.

Conclusion

Any business selling at these volumes must be using some sort of e-commerce platform or order management system, and these systems can be easily updated to provide access to free sales tax management services.


truck*A 53-foot tractor-trailer has approximately 4,000 cubic feet of carrying capacity, with a maximum cargo weight of approximately 50,000 pounds.


Debunking 3 myths about internet sales tax

March 8, 2013

The reintroduction of the Marketplace Fairness Act has resulted in the reintroduction of myths and half truths about its impact on businesses. In this post, we counter the three main fears about collecting internet sales tax.

Fear: Collecting sales tax is too difficult.

Some point to the fact that, nationwide, there are over 9,600 tax jurisdictions, and they argue that online sales tax collection would be so difficult that online retailers would have to hire additional staff to handle it.

Fact: Fortunately, technology provides an easy answer. Sales tax rates are easily stored and maintained in a database—it doesn’t matter if there is 1 rate or 100,000. Databases easily handle tax exemptions, too, for every location. Everything needed to figure out the correct tax rate is already present during an online sale: the purchaser’s address, the sales price, and the type of item being purchased.

Sales tax management services, which offer retailers an easy way to manage sales tax, have already been integrated with most e-commerce platforms, so starting to collect sales tax can be as easy as checking a box.

The proposed legislation is doing its part, too, to make collecting sales tax easy. It requires that states simplify their sale tax laws before online retailers start collecting, lets retailers file one sales tax return per state, and centralizes the registration process. It also requires states to make available free sales tax software for retailers that can work with all states.

So much for the concern over difficulty; what about cost? Sales tax management services are available at every price point—including free. So collecting sales tax doesn’t need to cost an online retailer anything.

And it’s also worth noting that most online retailers won’t have to collect sales tax at all. Only retailers with over $1 million in annual out-of-state sales will be affected.

Fear: This will give local stores an advantage over online stores.

Fact: Actually, it will correct an artificial advantage that online stores currently have, creating a more level playing field for all retailers.

Right now local stores have to collect sales tax while online stores don’t, which gives online stores the appearance of a price advantage of up to 10%. Even when bricks-and-mortar retailers also sell online, it doesn’t change the basic fact that in their local stores, they have to collect sales tax, while online stores don’t.

If the law doesn’t change to keep up with the way people shop, the logical conclusion is that many businesses will elect to only sell online—which would mean no local shopping. Picture your community without a bookstore, clothing store, or electronics store. That’s not what anyone wants.

Fear: This is a new tax.

Fact: If you live in a state with sales tax, you already owe sales tax on your online purchases. If the retailer doesn’t collect sales tax, the purchaser is supposed to pay the tax due directly to the state. In other words, this isn’t a taxation issue, it’s a collection issue.

Most people don’t know that they owe sales tax when they buy online, and states find it almost impossible to enforce their own sales tax laws online. That’s why the Marketplace Fairness Act is needed: to allow states to enforce their own laws and end the sales tax loophole that favors online retailers over local retailers.


Congress shows states some love this Valentine’s Day

February 14, 2013

taxcloud_sweethearts

Congress sent states that have been losing billions of dollars in uncollected sales tax a valentine today with the introduction of the Marketplace Fairness Act, a bill that will give states the authority to require online retailers to collect sales tax.

Identical bills were introduced in both the House (HR.684) and the Senate (S.336). Similar legislation was introduced last year but expired when Congress ended its session in early January.

Momentum seems to be on the side of legislation. Let’s hope it passes quickly!


A return to state legislation for online sales tax

December 5, 2012

While the Marketplace Fairness Act continues to garner support in Congress, it remains in committee for the time being—which means that this holiday season, at least, the online sales tax loophole will stay open.

Without action from Congress on the issue of online sales tax, states are beginning to return to passing their own legislation. Two states, Michigan and Florida, have recently introduced bills that would require online retailers to collect sales tax.

Unfortunately, there’s not much states can do on their own—the Supreme Court said in 1967 and 1992 that states can’t require out-of-state retailers to collect sales tax. At the same time, though, the court said that Congress could and should decide the issue legislatively. That’s what the Marketplace Fairness Act is about.

We hope that all those state legislators, governors, local retailers, and others who are supporting state legislation will make their voices heard in DC, too. This is one instance where state action just isn’t enough. Congress needs to give states the right to decide for themselves whether they’ll require online retailers to collect sales tax.


Congratulations to Senator-elect Heitkamp!

November 26, 2012

Heidi Heitkamp

Congratulations to Heidi Heitkamp, who was just elected senator of North Dakota! Some of our readers may recognize her name: She was the North Dakota Tax Commissioner when the state brought suit against Quill Corp. in an attempt to require the catalog company to collect use tax on purchases made by North Dakota residents. The case famously went to the Supreme Court, which ruled that it would be too difficult for businesses to collect sales tax for states where they had no physical presence. But, equally important, the court also said that “the underlying issue here is one that Congress may be better qualified to resolve, and one that it has the ultimate power to resolve.”

Four bills currently before Congress attempt to do just that and close the online sales tax loophole. We look forward to Senator-elect Heitkamp’s support on the issue!


Same everything, except tax treatment (2)

October 31, 2012

 

Sales tax shown is based on delivery to a Connecticut address. Connecticut sales tax rates are among the lowest in the nation.


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.


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

August 31, 2012
Forbes

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.


Guest TaxGirl post: “Why I support the Marketplace Fairness Act”

August 27, 2012

Every August Forbes contributor Kelly Phillips Erb, who writes the TaxGirl blog, asks her readers to send in guest posts to be published while she’s on vacation.

This year she provided three topics for guest posts, including “Is it fair to require online retailers to collect and remit state sales tax?”

Sten R. Wilson has contributed a post on that topic titled “Why I support the Marketplace Fairness Act.” In it, Wilson, owner of a sheep farm in upstate New York, explains that for him, collecting sales tax has been made much easier by states’ simplification of sales tax laws (through the Streamlined Sales and Use Tax Agreement) and by automated sales tax management services.

He supports the Marketplace Fairness Act because it provides incentive for states to simplify their sales tax laws:

The combination of today’s freely available technology and states’ simplification efforts is a great benefit for small businesses like mine. It eliminates bureaucracy, promotes efficiency, and increases productivity and profitability. It makes dealing with sales tax much, much easier for small business owners.

Passage of S.1832 the Marketplace Fairness Act will prompt all states to simplify their sales tax laws. Therefore, I support the Marketplace Fairness Act.

We sincerely agree! Wilson’s perspective as a small business owner is an important one in the online sales tax collection debate, and one that we haven’t seen enough in the media. The post is definitely worth a look.


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
Briefing.com Research

Briefing.com’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 Briefing.com 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
RILA responds to Senator DeMint’s WSJ op-ed
NRF
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.


What wasn’t said at yesterday’s Senate hearing, but should have been: Free!

August 2, 2012

At yesterday’s Senate Commerce Committee hearing, numerous senators voiced their support for the Marketplace Fairness Act, which would close a loophole that allows online retailers to avoid collecting sales tax.

Several senators, among them Senator Lamar Alexander (R-TN), said that they were particularly concerned about states’ rights. Under the current system, states cannot enforce their own sales tax laws; the bill would allow states to decide if they want to require online retailers to collect sales tax from state residents. Others cited concerns about simple fairness: Local small businesses—particularly those that sell high-end goods such as cameras, jewelry, and electronics—often serve as showrooms for customers who then buy online to avoid paying sales tax. The inequity is hurting local small businesses across the country.

Opponents of the bill were primarily concerned with the costs and complexity of collection, saying that it would be too difficult and expensive for small online retailers. Several supporters responded that if the bill is passed, more sales tax management services will be created and the market will act to bring down costs.

Scott Peterson, Executive Director of the Streamlined Sales Tax Governing Board, testifies before the Senate Commerce Committee, and even shows off to the members of the committee how easy and accessible sales tax has become – that you can even do it on a common device, like this iPad (and yes, that’s TaxCloud).

Which brings us to what wasn’t said: The market has already acted. A completely free sales tax management service is available right now. TaxCloud calculates the sales tax due for any region of the county, collects and remits sales tax, files sales tax returns, creates detailed records of sales tax transactions for shop owners, and even provides indemnification and audit relief—in short, it resolves every concern raised by Senator Kelly Ayotte (R-NH). It does all this at absolutely no cost to the business.

It’s too bad that this wasn’t mentioned by any of the bill’s supporters, because it directly counters opponents’ primary objection to the bill. We don’t have to wait for the market to act to bring down the costs of collecting sales tax. That cost can range from zero to as much as a business wants to pay, depending on the service a business chooses—there are multiple options already on the market today, including Accurate Tax, ADP TaxWare, Avalara, CCH SpeedTax, Exactor, and TaxCloud. Importantly, a no-cost option is already available.

Overall, the hearing showed a great display of support from many senators—and, we were pleased to note, except for only a few instances (which we will resist detailing here), an atmosphere of professionalism, courtesy, and collegiality reigned, even among those who disagreed on the issues.

You can view a video of the hearing on the Senate Commerce Committee website.