September 18, 2014

Could E-Commerce Sales Tax Become a Reality?

Whether you buy or sell online, you may need to watch out. Cash-hungry state governments are reconsidering something that’s long been threatened and debated:  taxing Internet sales.

keep Internet sales tax free

One of the reasons I’m a frequent online shopper is, thanks to a 1992 U.S. Supreme Court decision, unless the retailer has a physical presence in your state, it does not have to charge sales tax. This can mean huge savings for consumers on big purchases; big retailers like Amazon have profited immensely from the law.

States have sought ways around the Supreme Court decision in the past. In 2008, New York ruled that any company that has an affiliate relationship with another business in the state would have to collect sales tax. Amazon sued, lost, and appealed; a ruling on that appeal is due soon. In Colorado, a law was passed requiring out-of-state retailers that don’t collect sales taxes to give the state a list of customers’ names and purchase amounts so tax collectors could contact them for payment. The law is also currently being challenged in court.

While in the past, business organizations have fought back against efforts by states to charge sales taxes on such purchases, the Los Angeles Times reports that now, business groups are actually urging the law be changed. Why? Because they feel that big retailers like Amazon are getting an unfair advantage. Considering that most states right now are cash-strapped and desperately seeking revenue, state governments are lending an ear when business organizations urge changing the laws.

With thousands of tax jurisdictions nationwide, collecting sales taxes on online purchases could be a nightmare, some small e-commerce retailers contend. But other experts say there’s computer software that could simplify the task.

Recently Rep. William Delahunt (D-MA) introduced a bill that calls for a national solution to make online sales tax collection easier. The Main Street Fairness Act would allow states to collect sales tax from out-of-state retailers if the states agree to streamline their sales tax systems. The bill already faces opposition from eBay, which is calling for a small-business exemption.

I’ve seen this issue argued ever since e-commerce became a part of our lives in the 1990s, so I’m not expecting a quick resolution on the issue. But you should be aware of what is going on in your state, because in today’s economy, there’s renewed risk that collecting e-commerce taxes could actually become a reality—one for which you need to be prepared.

22 Comments ▼

Rieva Lesonsky


Rieva Lesonsky Rieva Lesonsky is a staff writer for Small Business Trends covering employment, retail trends and women in business. She is CEO of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Follow her on Google+ and visit her blog, SmallBizDaily, to get the scoop on business trends and sign up for Rieva’s free TrendCast reports.

22 Reactions

  1. Rieva,

    The State and local governments are up for anything that will create extra tax revenue. It just never ends.

    I don’t like it, one little bit.

    The Franchise King

  2. I don’t think regulators realize how difficult it is to navigate through all the sales and use tax laws of the various states. My business rents electronics (computers, projectors, camcorders, GPS units, etc) on a short term basis, and ship anywhere in the US. Because I own the equipment, I have nexus (a presence in the state) for every rental. This means I have to collect sales and use taxes.

    The sales tax laws for each state are different. It was so difficult to navigate the first out of state rental that I almost gave it away, just so I did not have to worry about sales tax. It took me a long time to find a vendor that could help me with sales tax because rental (use) taxes are different from sales taxes in some states. Sales tax is complex enough without use tax.

    I don’t mind charging sales tax. It is a pass through tax that theoretically doesn’t cost me anything. However, the states should make it easier to figure out and collect sales tax. I am spending thousands of dollars and countless hours this year to figure out and pay sales tax. It is so difficult sometimes that it is almost like the states don’t want the money.

    It would be helpful if the states could get together on their own and streamline / standardize some of the rules. (Please don’t make/let the federal government get involved. Please.) Make it easier for those of us who do have to collect sales tax and want to do the right thing.

  3. It would really suck. I get a good number of business at my ecommerce sites mainly because of no taxes online.

    On higher priced items it matters quite a bit.

  4. How would such a tax be policed? What about businesses which sold to the US but were based elsewhere? It’s not a simple problem and I can imagine it leading to even more complications.

  5. States will consider additional sources of revenues due to the current economic conditions, hoping that they will collect additional sales and use taxes.

    The likelihood of states considering the additional burden imposed on the small operators is very small.

    Just as the “Mom and Pop” store is about to offer their products on line to a national or even global audience, the additional burden of required record keeping, tax collecting and submitting, makes it all less attractive financially.

    Thank You for an awesome post.

  6. This will not make me happy. No tax is one of the main reasons I shop online. You have to consider shipping, but many times the shipping is less than what the sales tax would be. This will make it tough for many E-Commerce sites. They will really have to up their game by offering free shipping and specials, which will cut into their budget.

  7. I agree that large ecommerce websites have an unfair advantage over in-state stores, but the small ecommerce businesses would suffer greatly unless there is an exemption for them. Large corporations of all kinds have unfair advantages and often end up taking advantage…

  8. Until these states can learn how to balance their own budget and run things with out so much waste. They need to stay out of the internet. If they are allowed to collect taxes, it is not going to help anyone. They already have revenue streams that they can’t manage now. What are law makers thinking when they can’t even handle what they already have. States need to keep out and stop trying to get this passed! Enough is enough!

  9. Everyone who thinks that not paying sales tax for on-line purchases actually think they are saving money are fooling themselves. The more you buy on-line the less money you local town or city has to spend on police, fire and other services that you want to have available. These services have a cost whether you see it or not. So if you choose to not give to the common good by avoiding sales tax, then you will be charged in other ways. Your water rates will increase or your state income tax will increase or your kids will have to pay for their books in grade school or high school. It is already happening now as schools are placing fees on after-school activities like sports or band. In my area the schools WILL NOT provide a school bus to take kids to after-school events. The parents have to pay for the use of the school bus.

    To address the issue in the article, on-line retailors do have an advantage over brick & mortar stores. They do not provide any benefit to the community. They do not provide jobs to the people in that community. The money generated by the on-line retailors does not flow back into the community. It is gone just like all of the foreign workers who send their money home. There is no flow of money thorugh the local economy so there is less money available for everyone to use. I really do not know why this has to be explained because if anyone who has an elementary knowledge of economics should understand this principle.

    The only way to solve this problem is to create a national sales tax for on-line retailers. These businesses already know by the credit card being used which address the purchase is being originated from so the tax can be split up according to the state and the zipcode of the purchase.

    Soory if you don’t like the idea of not having to pay sales tax. Everyone has to understand that we live in a pay as you go society. There is no free lunch.

  10. Just when I thought the web was a good place for small online businesses, now this comes along. They should at least exempt small businesses.

  11. I am all for an internet tax. Why is it fair for a company outside my state to sell to customers tax free when I have to collect sales tax? This would put all business on a level playing field. If you don’t want to pay the internet tax then buy local!

  12. I’m a huge fan and supporter of local business and do everything I can to drive by national chains to spend money where it will circulate many times throughout the local economy instead of heading out of town to large corporate headquarters.

    That said, the solution is NOT thousands of tax districts making it a nightmare for small business to sell across state lines. As with nearly every other regulation like this, it is regressive and oppressive to small business. Regulations of any nature almost never had a negative effect on large corporations who have a legion of lawyers and accountant to just write them into their systems and pass the cost on to the customer.

    When local businesses and giant corporations are given the same exact regulations to live by, the giant corporation jumps for glee because they know it is one more giant hurdle for small businesses who do not have a legion of lawyers and accountants to implement such laws. In 2009 Goldman Sachs made $2billion in profit (not revenue – PROFIT) and paid $00.00 in taxes, thanks to their legion of lawyers and accountants. A small business making $200,000 in profit is going to pay heavy taxes under those same regulations because it would cost $200k or more to pay their lawyers to figure out how to shift it like the giant corporation does.

    Corporate tax laws are almost always regressive – small business has the exact same tax code as WalMart – a $400 billion business. Big business pretends to not like regulations, but then jump for joy with every tiny obstacle they present, because they know they are giant hurdles to their small business competition.

    A national tax starting only at $X million dollars in revenue that exempts small business would work well and would allow local businesses who also sell online to keep more of their revenue local. The chance of small business being exempted from such a law is slim and none. Big business working together with big government would see to that.

  13. We are a small company that manufactures racks for pickup trucks and has 9 employees. We have been in business for 10 years and have annual sales of about $650,000. We have lost money for the last three years. In the last 10 years in spite of our membership in marketing organizations, we have been unable to break into the brick and mortar truck accessory market. This is because of the well establish distribution system controlled by a few huge distributors that essentially lock out start up companies in favor of huge auto accessory companies against which we compete. Since we cannot get distribution to the thousands of retail stores throughout the U.S. to whom we would sell our goods, we have been limited to being a direct on-line retailer. We do a good job of providing specialty design products for special applications, but if on-line sales tax become a reality it will have a devastating impact on already meager sales. Small companies, including many start-ups will be pushed into oblivion in favor of the big boys. I don’t think that is what Americans want, but it will change history, because it will make starting small businesses even harder.

  14. Being a small business owner, it’s not the sales tax itself is the problem. After all, any small company merely passes the tax on to the consumer… The major issue for me is having to now deal with 50 different state entities all having different reporting requirements. What a nightmare.. It’s bad enough trying to deal with just one ! then add all the various local, city and county taxes that also will want to join in the “feeding frenzy”… There is no way a small business could survive meeting the reporting and accounting requirements. They would be bogged down in endless paperwork. Even if we could comply which would require hiring more staff just to deal with it all , those costs would have to be passed on to the consumer in the form of price increases… One way or the other, the consumer always gets to pay…

    I have no problem with an internet sales tax, (“no skin off my nose” as the saying goes) but the only way it can work would be to have only one Federal reporting entity that apportions the sales/use tax revenues back to the states, all the while keeping the reporting requirements extremely simplified. That would negate the impossible nightmare of having to deal with 50 or more tax authorities which simply would not work for any small business.. Only problem as I see it, is when was the last time you ever saw any govt bureaucracy being able to do anything simple and efficiently ??? Let’s face it: that’s not about to happen !

    Bob

  15. I own a small business and would welcome the “internet” tax. We already charge sales tax to our customers. More and more are buying out of state by phone, mail order or internet to ESCAPE the sales tax, in my case 7%. Even if I match the out of state price I am 7% high since I have to charge the sales tax. When I go to a show, rally or fair and setup in a different state I have to get a temp state license and collect the sales tax from that state. Whoever sells the product should have to charge their states sales tax. Most businesses already should be reporting something to their states internal revenue department so it should not be that much extra work for small or large businesses to pay the tax. The other alternative which won’t happen is to let me sell tax exempt to compete.

  16. While I would strongly prefer that the “net” remain essentially free of sales and use type taxes, I think it is a forgone conclusion that transactions on the net will be taxed similar to what goes on in “brick and mortar” stores right now. In addition to the “state issues” discussed in other comments, there are also local and national interests that seek to tax “virtual trade” similar to the “physical trade” that occurs in traditional “brick and mortar” locations within their physical boundaries. The current economic conditions and budget issues will only put more pressure on this desire to tax.

    The real question, I believe, is how to address this “irresistable force”. Is the right course of action to continue to fight on all fronts, at all times, on all issues? Or is it to propose a limited, rational, use tax tied to the location of the consumer that is nationally controlled? This would be similar to the VAT in Europe and other countries.

    To summarize, if you think taxation is unavoidable, then isnt it wiser to try to take control up front and drive this in the most moderate and controlled fashion?

  17. John Horgan,

    I don’t think internet tax is a foregone conclusion – the only case to make it to the supreme court ruled against it.

    I also think that assuming it is inevitable is to give in to the ongoing relentless desire of government to take over every area of our lives. Where does it stop? Or do you believe it’s a foregone conclusion that government should just expand endlessly? If not, then there is a point at which we draw a line in the sand.

    A greedy business falls in on itself – not a single greedy company is still in existence 200 years later. But a power-hungry government expands endlessly. And it is the attitude that “its a foregone conclusion” that allows them to do it.

    By the way, Chris Green’s story above is a classic example of why local business should fight these kinds of regressive taxes. It won’t hurt the big companies one bit but will put local guys like Chris Green right out of business.

  18. The article positions online shopping as a way to ‘save’ money by not paying taxes. However, everyone shopping online who lives in a state that has a sales tax is already supposed to be paying sales tax in the form of Use taxes. Unfortunately most people do not know this – and even if they try, they simply (and understandably) cannot be expected to remember every MP3, ringtone, and eBay purchase at the end of the year when they fill out their tax returns. The Main Street Fairness Act simply mandates that all merchants must collect sales tax – based upon the simplification and streamlining measures already established by 44 states.
    I agree that the prospect of keeping track of thousands of local jurisdictions *could* be difficult, and historically it has been. However, technology has made it easy for sellers to manage inventories, shipping, targeted marketing etc. And there are companies that can automate the sales tax collection process. Our company, FedTax.net, offers such a service (called TaxCloud). It is completely free to the online retailer. It is certified to comply with the Streamlined Sales Tax Agreement, which means that TaxCloud calculates the tax due for any transaction in the US, and offers merchants advantages in terms of tax amnesty and tax indemnification from States that participate in the Streamlined Sales Tax initiative.
    I think that some of the voices in this debate are spinning this as a ‘new’ tax. In my opinion it is simply adjusting existing legislation to catch up with the reality that so much business is now being conducted online.

  19. Although I am sick of new regulations and taxes, the thought of a sales tax is one way to ward off a very large shortcoming of tax based revenue.

    This lost revenue (used to be collected from brick and mortar) is a large part of our government programs like police, fire, general maintenance and SCHOOLS.

    One of my friends reports paying upwards of $250.00 in fees, books and supplies for other less fortunate children just to enrol his daughter in Jr. High school.

    I also think that it is killing our brick and mortars.

    Every time I have to renew my permits to operate my limousine service their are drastic increasses in fees. A license to operate in Denver went from $25.00 to $75.00. Tags for my cars went from $10 to $50.00 each. All of this is due to lost revenue streams for the government and it will continue to go up.

    The tax on sold goods should be paid regardless of being sold on line or not. Each state mandate that a business operating in that state follow that states tax rules. That way it is not confusing for anybody.

    None of this will put anyone out of business because everyone will be on a level playing field. Even large corporations.

  20. Anyone out there collecting sales tax? What software are you using? We are a digital bookseller looking for an affordable solution which includes districts and is compatible with Ingram digital.

    Any recommendations would be appreciated

    Kerri

  21. Unlike many online retailers, I am not concerned in the least about people not buying from me if I charged sales tax. I don’t have the overhead of a brick and mortar location (employee expenses, property insurance, utilities, etc.) so I will always have a price/profit advantage (plus, I get to write off a portion of utilities as “business use of home”). Most people shop online because it is convenient, easier than fighting the crowds and because online stores have a far wider selection than local stores do. If the local WalMart carries the same exact items you do online, you probably do not have a very successful online business.

    The main problem to the small e-commerce website owner is that it would be impossible to keep up with the ever changing municipality taxes all over the country. While some argue that a “simple software solution” could solve that problem, it discounts the fact that every online shopping cart is not the same and that there is no one-size-fits-all solution that would integrate into every e commerce shopping platform. It takes me at least 30 minutes to figure out and pay the taxes owed to the state of Florida, where my on-line business is located. You want me to do that times 50 states every month?

    Those that argue about the poor school districts, fire departments, etc. that need this money are passing the buck (literally). That’s what real estate taxes are for! Isn’t it bad enough that homeowners who have no children have a significant portion of their real estate taxes going to pay for your children’s education? Now you want out of state businesses to collect money for your children too?

    The states already have laws on the books that require their residents to pay “use taxes” on out of state purchases. Shifting the responsibility of collecting these taxes to small businesses because the criminals in your own state refuse to do what is required of them by law is unreasonable. I would have no problem with providing a list of the names and addresses of anyone who purchased from me online and shifting the responsibility of enforcing state sales tax laws back to the states who enacted them. Of course, this would cause a big uproar over “privacy concerns” – a term used quite often to protect criminals (yes, and if you are not paying the use tax you owe to your state, you ARE a criminal).

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