SFGate: The next step for California

July 5, 2011

SFGate: What's next for California sales tax collection

A new column on SFGate.com, the San Francisco Chronicle website, speculates on what’s next for online retailers and state legislators now that California has passed affiliate nexus legislation.

The author points out that neither Amazon nor Overstock—both of which immediately dropped their California affiliates upon the bill’s passage—are currently collecting California sales tax, even though the new law has gone into effect. How will the state respond? According to Betty Yee, a member of California’s Board of Equalization:

“So, we’ll bill them at the end of this quarter, based on estimates either they provide or we come up from other data sources. Then, if they don’t come forward and pay, we’ll consider other courses of action.”

It seems pretty unlikely that they’ll “come forward and pay,” and according to the article, litigation is likely the next step. In fact, Amazon is currently in the middle of a lawsuit challenging New York’s affiliate nexus law—which has, thus far, been upheld.

One could argue, of course, that because they’ve dropped their California affiliates, Amazon and Overstock no longer have nexus in the state. However, Amazon, at least, has subsidiaries with offices in the state, such as Lab126 in Cupertino, which designed the Kindle. Under the California law, those subsidiary locations may be sufficient to establish nexus for Amazon—a matter that now seems destined to be determined by the courts.

Unless, that is, federal legislation renders the question moot. Our favorite part of the column is the section with the header, “Over to you, D.C.” We’ve long argued that federal legislation is the best solution for both states and retailers, and we’re happy to see that on that, at least, everyone seems to agree:

If there’s one thing both sides of the online tax fight appear to agree on, it’s the need for the feds to step in.

“What we’re trying to do is to get Washington to clarify nexus, and revise the Quill decision,” said [Bill] Dombrowski, [president of the California Retailers Association] who is also a board member of the National Retail Federation.

“The right way to fix this is with federal legislation,” Amazon CEO Jeff Bezos said in an interview with Consumer Reports in May. Bezos said his company has long favored an across-the-board “streamlined sales tax initiative,” an idea offered up a decade ago by the National Governors Association, and which 24 states (not, as yet, including California or New York) have signed on to.

The column discusses the Main Street Fairness Act specifically, although we think the description is a bit misleading:

Under Durbin’s bill, “all businesses must collect state sales tax on all purchases, whether or not the business has a physical presence in that state … but based on where the buyer is located,” he said, announcing the proposed legislation earlier this year.

What that brief description doesn’t mention:

  1. The bill doesn’t allow every state to require out-of-state businesses to collect sales tax—just those states that have made it easy for businesses to collect their applicable sales tax by adopting the Streamlined Sales and Use Tax Agreement (SSUTA) guidelines.
  2. The bill lets states decide on their own whether to join SSUTA in order to gain the authority to compel out-of-state retailers to collect their sales tax.

But that aside, the column offers a good overview of the current situation in both California and the nation at large. We can’t include here all the details it includes on the response to California’s new law, so we suggest you go read the entire thing yourself.

Washington Post op-ed: Close the tax loophole for online retailers

July 1, 2011
Washington Post Opinion: Close the tax loophole for online retailers

Washington Post Opinion: Close the tax loophole for online retailers

A new Washington Post opinion piece by Dan Crippen, executive director of the National Governors Association, and former director of the Congressional Budget Office, criticizes Congress for the tax exemptions given to special interests and makes a strong argument for ending the sales tax collection exception for online retailers:

Even now, as states struggle with lagging revenue, increased needs and balanced-budget requirements, there are numerous bills in Congress to exempt special interests from state taxes — for rental cars, cellphones, online travel services and “digital goods.” Such efforts [justify] the exemptions as preventing “discriminatory” taxation. But in reality, they all preempt state taxing authority to give special tax treatment to the politically well-connected.

The most pernicious erosion of state sales tax bases is the proliferation of the sales of goods and services on the Internet — goods and services that if purchased from a local business would have sales tax collected. In other words, Internet sellers receive a tax subsidy for much of what they sell. (emphasis added)

But according to the piece, it’s not just a matter of fairness—of leveling the playing field so that all retailers play by the same rules. It’s also a matter of acknowledging the benefits local retailers bring to communities that can’t be replaced or replicated by online retailers:

This is unfair to local retailers that not only collect sales taxes but also contribute to the local economy, pay state and local taxes, operate as showrooms for Internet sales and technical services, create most of our jobs and contribute to our communities by sponsoring Little League teams and more.

Embedded within that quote is a problem we’ve heard small business owners talk about over and over: Shoppers are visiting local stores, browsing the shelves and asking clerks questions, and then actually making their purchases online. It’s a huge problem for local retailers that are struggling anyway in this economy.

We’re thrilled that this piece counters two of the arguments that are most often levied against online sales tax collection, that it’s a tax increase (false) and that it would be too difficult for businesses (also false):

Of course, it is not a tax increase — it is a means of collecting taxes owed. In most states, the consumer is legally responsible for reporting and paying sales tax on out-of-state purchases. As such, the Internet encourages tax avoidance; the lack of an effective system to collect sales taxes at the time of purchase causes many Americans to incur — but not pay — the taxes they legally owe. This legislation is no more a tax increase than when a company that has not paid into the Social Security system on behalf of its employees is made to do so. . . .

Administrative complexity is the closest that opponents come to a legitimate argument. Indeed, the Supreme Court ruled against states in Quill v. North Dakota [in 1992] precisely on the grounds that it would be too hard to collect all of the different state sales taxes. Since that ruling, at least two facts have changed: (1) the proliferation of computers to calculate taxes due on sales — just as shipping costs are determined based on Zip code — and (2) a state agreement on streamlining and simplifying sales taxes so that there is only one point of collection per state and only a few tax rates per state. Does anyone really believe that a business that operates on the Internet cannot also compute the amount of tax owed?

We would add, of course, that if an online retailer is struggling with sales tax for any reason, services like TaxCloud are available to take that burden off their hands, at no charge.

The piece also points out what exempting online retailers from collecting sales tax ultimately means for taxpayers:

Allowing Internet sellers to escape sales taxes also means that state and local governments will be forced to rely more heavily on personal and corporate income taxes, undermining consumption taxes that economists mostly favor.

It’s a wonderfully thoughtful, cogent article by  someone who knows what they’re talking about, and it’s particularly relevant in light of California’s recent legislation. We highly recommend you head over to the Post and read the entire thing.

THUD! Did Congress hear that?

June 30, 2011

Yesterday California passed legislation requiring any out-of-state retailer with an affiliate in California (or warehouse/drop-shipper, or any other physical or economic presence)  to collect California’s sales tax. It’s the seventh state to enact affiliate nexus legislation, after New York, North Carolina, Rhode Island, Connecticut, Illinois, and Arkansas.

This is a signficant move, but unfortunately it’s the wrong one. As a result of this legislation, affiliates face either losing their income or moving out of the state. In fact, in less than 24 hours, Amazon and Overstock have already ended their affiliate programs in California, just as they did in the other states when they passed similar legislation.

A better option is still available for California by simply joining the Streamlined Sales and Use Tax Agreement and urging Congress to enact federal legislation such as the much anticipated the Main Street Fairness Act (or MSFA). Enactment of the MSFA will enable the states to repeal affiliate nexus laws, and in so doing, restore a significant revenue source for many of their smallest businesses, while also gaining the legitimate authority to collect significantly more revenue.

So, the good news is that as the eighth largest economy in the world, California attracts a lot of attention. There’s a reason for the saying “As goes California, so goes the nation.” Congress cannot possibly ignore the message that California is sending: states want and need federal legislation allowing them to require out-of-state retailers to collect sales tax.

But if anyone in Congress is still wondering if this is matters in their district, here is a small portion of the local news websites  that have published the news that Amazon has dropped its California affiliates (not including California sites):

We are confident that with California’s bold statement, Congress will acknowledge the unmistakable THUD heard ’round the country yesterday. California’s legislation is just the latest plea from states that federal legislation regarding online sales tax collection is absolutely necessary. It’s time for Congress to act.

Florida TaxWatch urges online sales tax collection

June 28, 2011

According to an editorial in the Gainesville Sun (FL), a nonpartisan Florida think tank has recommended that the state improve out-of-state sales tax collection:

Florida TaxWatch, a business-backed, nonpartisan think tank, has recommended that the state improve tax collection on remote sales from out-of-state mail-order, phone-order and Internet businesses.

“It’s not a new tax. It’s a tax that’s been on the books since the 1960s,” TaxWatch CEO Dominic Calabro says.

TaxWatch estimates Florida could collect $35 million to $50 million a year even without approval of pending federal legislation intended to facilitate remote sales tax collections by the states.

“By not collecting it,” he said, “we are putting our own brick-and-mortar retailers and their employees at a 6 percent to 8.5 percent cost disadvantage.”

The article suggests that the Main Street Fairness Act “does not appear imminent,” but we disagree—we believe it will be introduced in the next month or so. But we are glad to see the editorial recommend that Florida join the Streamlined Sales and Use Tax Agreement:

In the meantime, Florida should join with other states in the Streamlined Sales and Use Tax Agreement. That would allow Florida to collect sales taxes from sellers already voluntarily making payments to states participating in the agreement.

Although the editorial doesn’t mention it, by joining SSUTA Florida would also make it easier for retailers to collect multistate sales tax—it’s a move that benefits both states and businesses.

While we’re glad to see states support online sales tax collection and we hope they do join SSUTA, we continue to believe that the best thing state lawmakers can do is contact their delegation in Congress and let them know how urgently federal legislation is needed.

States can only do so much on their own; to truly level the playing field between online and offline retailers and make collecting sales tax easier for multistate retailers everywhere, federal legislation is necessary.

Baltimore Sun editorial supports online sales tax collection

June 24, 2011

The Baltimore Sun has published an editorial supporting online sales tax collection. It begins:

There’s no denying the convenience and simplicity of shopping online. Successful retailers like Amazon.com and Overstock.com have become giants as a result. Small wonder that online sales have grown to an estimated $200 billion annually, or about 7 percent of all retail transactions that take place in this country.

But should taxpayers be forced to subsidize the industry? That’s essentially what happens now as the bulk of digital sales are not subject to state and local sales taxes. Not only does it give virtual commerce a big advantage over their Main Street competitors but it means that states have to balance their budgets with revenue from other taxes instead. (emphasis added)

The rest of the editorial is equally strong, addressing concerns about online sales tax collection (particularly political concerns) head-on. We were particularly excited to see that it directly refutes those who call sales tax on online purchases a new tax or a tax increase:

But in vetoing the bill [that would have made more Internet companies subject to his state’s sales tax], Governor Perry also acknowledged that something needs to be done to make the system fair. That will require action by Congress where, unfortunately, Republicans appear loath to take any action that might be construed as a tax increase.

Of course, this is nothing of the kind. Rather, it’s an acknowledgement that Internet retailers no longer require the sales tax exemption that might have seemed appropriate for the fledgling industry 19 years ago. Allowing that advantage to continue is a jobs killer—mom and pop stores that pay taxes and employ local residents are getting the short end of the stick.

It’s an excellent argument, and we highly recommend that you read the entire editorial.

We do want to correct one item in the article, however:

One promising alternative is an ongoing effort to create a streamlined sales and use tax—a standardized sales tax nationwide. So far, 24 states have signed onto the agreement.

This statement could be easily misinterpreted to suggest a single nationwide sales tax rate. While it’s clear that they’re talking about the Streamlined Sales and Use Tax Agreement (SSUTA), readers should be alerted that SSUTA does not create or recommend a single nationwide sales tax rate.

States that are members of SSUTA agree to standardize sales tax categories and definitions, so that what falls into the category “candy” in one state doesn’t fall into the category “food” in another. They also agree to use standard tax return forms, so that retailers don’t need to fill out a different form for every state, and they agree to standardize other sales tax data, such as tax base definitions. All of this is designed to make it easy for retailers to collect sales tax for multiple states.

But SSUTA does not create a single sales tax rate for its member states, as the editorial seems to suggest. Every SSUTA state still retains the autonomy to set their own sales tax rate.

With that one correction, we can wholeheartedly recommend the editorial—which, incidentally, is just the latest in a long line of articles supporting online sales tax collection.

Florida small business owners on online sales tax collection

June 24, 2011
Gulf Coast Business Review

Gulf Coast Business Review: The $1.5 Billion Loophole

A new article in Gulf Coast Business Review (FL) highlights small local retailers whose business is suffering because most of their online competitors don’t have to collect sales tax:

“The challenge we have is that people will come into our store and ask to be fitted for the right bat, and then go on the Internet and buy that product,” says [Sandy Fortin, owner of 28 franchises of sporting goods store Play It Again Sports in Florida], who’s also treasurer of the Florida Retail Federation. “We end up spending payroll and time with customers, and then they go spend it on the Internet.”

Purchases of goods via the Internet continue to grow, and it’s costly to Florida’s brick-and-mortar businesses, like Fortin’s. According to the U.S. Census Bureau, from 2007-2009 Internet sales grew 4.8%, while brick-and-mortar store sales sank 9.1%.

And because out-of-state business aren’t required to remit the state’s 6% sales tax or additional local option sales taxes that push the rate to as high as 7.5% in some counties, local businesses argue it puts them a disadvantage. . . .

 “It definitely affects your sales,” [Fortin] notes. “We’re the ones creating the jobs. If we do more business in sports, we’re going to open more stores and hire more people.”

The article points out that the current sales tax system simply doesn’t reflect the realities of today’s marketplace:

“The problem is we have a retail marketplace that is changing,” explains Rick McAllister, president and CEO of the Florida Retail Federation. The organization is a big supporter of leveling the playing field along with other major business groups including the Florida Chamber of Commerce and Associated Industries of Florida. “It’s no longer brick and mortar,” observes McAllister, “the Internet is growing, growing, growing. We have a tax system that is not changing with a market system that is changing.”

The article also covers recently proposed Florida bills, Senate Bill 1548 by Senator Evelyn J. Lynn (R) and House Bill 455 by Representative Michelle Rehwinkel Vasilinda (D), that would have allowed Florida to join the Streamlined Sales and Use Tax Agreement (SSUTA). Interestingly enough, not long ago (April 26, 2011), the legislators organized a Main Street Fairness Day in Tallahassee, where we spoke alongside other Florida businesses in support of these proposed bills. Unfortunately, both of these bills died in committee when the legislative session ended on May 7. Hopefully Florida can finally get these important bills passed in their next session.

Once the federal Main Street Fairness Act is passed, states will be able to compel out-of-state retailers to collect their sales tax, but only if they make doing so easy for retailers by adopting and enacting SSUTA guidelines—otherwise, the burden of collecting sales tax is simply too great, and states will end up losing millions (or even billions) in uncollected sales tax.

It’s a well-written and balanced article, and we recommend you read the entire thing, particularly if you live or work in Florida.

Texas’ very public debate over online sales tax

June 10, 2011

Statesman.com: Texas House breaks with Perry

According to this article from the Austin American-Statesman (TX) and this press release from Texas Governor Rick Perry, it seems the Texas House of Representatives is at odds with the governor over provisions that would clarify what constitutes a retailer’s “physical presence” in the state. Retailers with a physical presence in the state are required by law to collect Texas sales tax.

The debate began last September, when Texas comptroller Susan Combs “sent Amazon a notice that it owed $269 million in sales taxes it failed to collect from 2005 to 2009. She noted that Amazon had a distribution center in Irving.” In response, Amazon threatened to close the distribution center, which would eliminate 119 jobs, and dropped plans for expansion that would have created 1,000 jobs.

The proposed provisions, which have now been added to Senate Bill 1, the omnibus fiscal matters bill, makes it clear that a distribution center does qualify as a physical presence. The Texas House and Senate already passed a bill (HB 2403) containing this language, but it was vetoed by Gov. Perry less than two weeks ago. The House passed the bill on fiscal matters with the provision intact on Thursday.

Interestingly, both the governor and supporters of the provision claim to be acting to support jobs. Said Ronnie Volkening, president and CEO of the Texas Retailers Association:

“We’re disappointed that the governor does not seem to appreciate the negative impact on job creation that continuing a sales tax structure that is discriminatory against Texas retailers can have.”

In turn, the governor issued a statement saying, in part:

I believe this provision risks significant unintended consequences, including a loss of Texas job opportunities and weakening of our state’s competitive advantage.

Actually, we believe that both of them have a point. And even better, we have a solution.

Mr. Volkening is right that allowing online retailers to avoid collecting sales tax hurts local retailers. And since local retailers supply local jobs, hurting local retailers ultimately means fewer jobs. But Gov. Perry is also right to be concerned that Amazon’s closing the distribution center will cause a loss of jobs.

But the problem isn’t with online sales tax. The problem is that there is no federal legislation regarding online sales tax, which Amazon CEO Jeff Bezos has publicly supported many times. Without federal legislation, individual states are creating a multitude of laws that end up targeting particular retailers and make it more difficult for all retailers (online and offline) to collect sales tax for multiple states.

What we need is the Main Street Fairness Act, which would allow states that have made it easier for retailers to collect sales tax (by joining the Streamlined Sales and Use Tax Agreement) to require online retailers to collect sales tax.

When such federal legislation is passed, it will make sales tax collection rules consistent in every state, and states won’t need to worry about warehouses closing and eliminating jobs, and local retailers won’t need to worry that online retailers have an automatic price advantage because they don’t have to collect sales tax.

Don’t get us wrong—there will still be competition. States will still need to offer a business-friendly climate to attract companies, and retailers will still need to offer competitive prices. But that competition will finally be on a level playing field.