September 18, 2014

Sliding Down the Internet Tax Slippery Slope

Amazon sues New York over Internet taxationIf you are an online vendor selling through affiliate programs to New York residents, and you sell more than $10,000 to New York buyers and sell through online affiliate sellers, you now are subject to New York taxes on such sales.

If you recall, I had written about this law before it was passed a few months ago (at the OPEN Forum).

It had been a pet project of former Governor Eliot Spitzer. But after he was ‘spitzered” and resigned in disgrace, I had hoped the proposal would languish and maybe even die.

No such luck.

This is one of those cases of protectionism where trying to protect one group hurts another. This has been positioned as helping brick-and-mortar sellers. Unfortunately, it hurts online sellers, many of which are small businesses. Dawn Rivers Baker hits the nail on the head:

The lobby for Main Street independent retailers — folks like the American Booksellers Association — is doing the happy dance, pleased with the victory and not feeling especially guilty about the false pretenses.

“Since 1999, the very start of our nationwide fight for e-fairness, this campaign has been about leveling the playing field for Main Street bookstores, who have had to contend with out-of-state online retailers that have skirted sales tax laws by offering consumers tax-free shopping,” said Oren Teicher, ABA COO.

Level playing field, my foot.

Those Main Street retailers never have to worry about more than one taxing jurisdiction, no matter where their customers live. Remote booksellers have to calculate the tax owed for all the different jurisdictions, which means they have to find out what county their customer lives in and what the sales tax is for that county, and that’s what they’d have to pay.

Amazon.com is fighting the law hard, because it makes so many sales through affiliates and will have to collect and remit sales taxes. Amazon.com has sued the State of New York, on the grounds that the law is unconstitutional. So we have not yet seen the end of this issue.

I hope Amazon prevails, because they will fight the fight for small businesses that sell through affiliate programs and for whom this law could be extremely burdensome. I have two reasons for being opposed to this law:

(1) I think this law will not have the effect that the brick and mortar sellers want. Online selling is not going away. People buy online for convenience and for wider selection, and not just based on price or whether the seller collects sales tax. Protectionism is always a poor substitute for free market forces.

(2) I see this as a slippery slope. Today, New York. Tomorrow, all 50 states. There are reportedly about 7,500 taxing authorities in the United States. What a nightmare if small vendors had to comply with all of them. Hmm, I think that’s why we have the interstate commerce clause of the U.S. constitution that prevents placing undue burdens on interstate commerce.

More at the Wall Street Journal. And there’s more at the Tax Foundation.

11 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

11 Reactions

  1. Anita, I think YOU hit the nail on the head when you say that people buy online for so many more reasons than the price. These tax considerations (while very important) make the assumption that price is the primary driver for most purchases. And I don’t think it is.

    This isn’t exactly the best analogy, but here goes. My parents live in Pittsburgh, PA which is only about two hours away from my front door. Pennsylvania doesn’t charge sales tax on clothing and food. So, it would make sence for me to do much of my shopping there since I go there about twice a month on average. But I don’t. I do about 95% of all my shopping here in Cleveland – even though I have a cheaper alternative. But it’s just not as convenient to buy clothes in PA – so I pay the premium.

    Online shopping (despite the taxes and shipping) might actually be an even better alternative when you start considering the overall cost of energy and transportation.

    Online shopping isn’t going away (like you said) but I certainly hope that these small business owners don’t fall into the same trap as brick and morter retailers that complain about the big box stores. Everyone has a uniqueness that brings value to a targeted customer base. The sooner every business owner truly understands that – the sooner price and tax shouldn’t play the biggfest role in how they get chosen.

    I wonder if I’m sounding too “soap-box-y” on this and totally missing the point.

  2. And the winner is: any state that does not have this law.

  3. Anita, this is one of those difficult policy issues where you can find small business owners as winners — and losers — on both sides.

    What you don’t note and that is contrary to popular belief is that consumers are STILL required to pay a usage tax on items purchased online, if the retailer does not collect a sales tax. It’s easy to leave that part out because I’ve never met anyone who did not totally ignore this tax requirement. But, technically, if you purchase something outside of your state and do not pay a sales tax in the state from which you are purchasing it, you are technically required to pay your state’s usage tax.

    Obviously, that makes us all cheats, as it is, in effect a “voluntary tax” that no one voluntarily pays.

    The government knows the easiest taxes to collect are those that are “hidden” in our wages and purchases. While small business owners know what it’s like actually write a check for the “payroll” portion of taxes and to pay taxes with a check quarterly, most individuals pay most tax in the form of withholding or as part of a transaction such as a retail purchase or an add-on to their monthly mortgage payment.

    So, while I personally — as a consumer — always seek the lowest price and avoid sales tax whenever possible, I also recognize that such an incentive is, in effect, being granted by my state (because of a Supreme Court decision) to the out-of-state retailer. And even while I take advantage of it, I must admit that it encourages me to purchase an item online rather than down the street where my neighbors work and where such a purchase would support the schools and parks and infrastructure of the place where I live and work, as well.

    While I can argue either side of this issue, I’ve come to accept it’s not necessarily a “small business” positive one.

  4. Hi Rex,

    You point out something important and I’d like to address it. Yeah, I didn’t talk about what consumers are supposed to do when it comes to paying taxes — I did not want to muddy the waters. Because I do not think that is the issue here.

    The issue here is: can a state force an out-of-state business to become its tax collection arm? That is the question we’re talking about.

    And the reason I think it’s much more burdensome an issue for out-of-state businesses than for in-state businesses, is due to the burden of complying with so many different tax jurisdictions.

    In the end, it’s the U.S. Constitution that applies — The Commerce Clause, Article !, Section 8.

    If Congress wants to change the Constitution, it should pass a Federal law constitutional amendment. But why should one state, acting on its own, be able to unilaterally make a change that impacts everyone and attempts to override the U.S. Constitution? See, that’s the part that I go back to.

    I don’t cry any tears for Amazon, because it’s rolling in dough and as a huge company can afford to collect and remit taxes better than most. But I’m pulling for Amazon in this case simply as a proxy to fight the battle those of us without deep pockets can’t fight.

    The bookseller wars (small local bookstores against Amazon) have been going on for years. I actually feel more sympathy for small local booksellers than my article would suggest, because I know people’s livelihoods are on the line.

    But I don’t think this move will change a thing when it comes to consumers deciding where to buy. The Internet market forces are too large and too deeply ingrained, and consumers’ shopping behavior has changed too much, for this one thing to make a difference.

    It’s not just the lack of taxes on Internet purchases that is changing retail: it’s consumers’ expectations about wide choice and comparison shopping; it’s about malls and shopping centers with high rents; it’s about the faster pace of life; it’s about big retailers having economies of scale that enable lower prices than smaller retails can ever hope to offer.

    Shopping is a complex thing and doesn’t come down just to price. There will always be those who want to shop in person in a store for certain things, regardless of price or taxes. I regularly go to physical bookstores when I want to pick up a few books to read, because I like the physical act of flipping through books and reading a few pages to see if it suits my style. I can’t do that online. Paying taxes on a couple of paperbacks makes not a bit of difference to me. Nor do I bother running all over town to see if I can save a buck or two on the paperbacks somewhere else — my time is more important to me. But I also shop on Amazon for books as gifts (due to wish lists and wide selection and return policies) — for gifts, Amazon is my top choice.

    And the reality is, New York doesn’t give a hoot about local booksellers or retailers either — that’s just a convenient excuse. If New York officials really cared, they would have taken action much earlier and done more than approach it from a tax revenue measure.

    This is a tax revenue grab by the state of New York — pure and simple.

    It’s part of a much larger trend, affecting all kinds of taxes, where state officials are getting super-aggressive in going after out-of-state businesses. This is just the tip of the iceberg. A lot more small businesses are going to get hurt by the states’ aggressive action if Congress does not put on the brakes to states that impede interstate commerce.

    Anita

  5. I understand the frustrations of the brick and mortar businesses but I think this is a little much. Price does not always dictate whether I am going to purchase online or not. Most often the choice comes down to convenience and variety. I have better luck finding books by my favorite authors online than I do at Borders or Barnes & Noble. I too am glad that Amazon is fighting this for the rest of us. They have the resources to fight this better than anyone else.

  6. There’s another consideration that I didn’t cover over at The Journal Blog, and that’s the issue of equal treatment under the law. That’s the real legal standing under which the Main Street bookstores (and other retailers) might demand that out-of-state retailers should be forced to collect sales taxes like they do.

    Of course, with the Supreme Court’s Quill precedent, they lose thanks to the even larger issue of unduly burdening interstate commerce. But that would completely go away if the states were to get together and simplify and streamline and consolidate their sales tax regimes — something that the Streamlined Sales Tax project fails to accomplish.

    As a resident of the state of New York, my biggest concern is about online microbusinesses here. Because if this budget move were to survive Amazon’s judicial challenge, I can easily envision that the smaller companies (particularly nonemployers) will opt to refuse to accept affiliates based here because that gets them out of having nexus here. At that point, it will be in-state microbusinesses that will be losing money. I think that sucks.

    I think that the state government thinks the $10,000 minimum is a sufficient small business exclusion that they won’t be hurting the little guys. And that might be true if all you’re talking about is book retailers. Small businesses that sell larger ticket items could hit that $10,000 in sales in NY a lot faster, though. I have a hunch that the target here was Amazon and, as usual, nobody was there to speak for smaller online retailers.

  7. This is very disappointing to hear and I wish Amazon much luck in fighting the good fight. And price isn’t what drives my online purchases either. It’s the multitude of choices that exist online that draws me in. An even bigger draw for me is time. Why travel to different establishments and pay high fuel prices to do so when I can do it all from the convenience of my living room? I’ll even pay a higher price for an item online if it’s something that I don’t feel like taking the time to shop around for or spending gas money to do so. I hope Amazon wins this one. Because I agree with Anita here. This will set a precedent and open the flood gates if it passes. . .

  8. “And the reason I think it’s much more burdensome an issue for out-of-state businesses than for in-state businesses, is due to the burden of complying with so many different tax jurisdictions.” – Anita Campbell

    Bingo !

    I work for a “small” online reseller in Ohio with no nexus in California, yet because of our volume of business in the state we must collect sales tax for all California transactions. That alone has cost hundreds it not thousands of dollars in overhead in the form of modifications to our e-store, our quoting systems, additional accounting fees, etc.

    If NY were to enact a similar policy and this trend were to continue to other states I am confident that we would survive, however I can see that it would be a lot harder for new startups to make it as far as we have.

  9. I look forward to the day when people understand the meaning of free markets with out any “border controls”. Is it time to go back to the library and read for example Adam Smith?

  10. … and then there are international considerations. We are an Australian on-line service operating in 15 countries, all of which have individual tax laws. It appears however that if you send orders from Australia to andother country the VAT/Sale Tax/GST does not need to be collected/paid as it is and international transaction.

    Governments are going to really struggle with this as it is possible to send orders from any “source” location to avoid the tax in the recipient location.

    It does however occur to me that the small retailers should look at the “floral” selling model of delivering product via the local store. If the get together, like flowers they could compete against the bigger companies.

    I support Amazon’s endeavor, after all, we are living in the 21st century!

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