Sales Taxes On Internet Purchases Seem To Be An Inevitability

The days of tax-free online shopping are coming to an end.

OnlineShopping

For years now, brick and mortars retailers have complained about the fact that online retailers like Amazon have an advantage over them in that they are not required to calculate and charge sales tax for their purchases. Indeed, many of these same online retailers have often touted the fact that they don’t charge sales tax, along with lower prices, as one of the reasons to attract customers. States and localities, on the other hand, have long been eager to get their hooks into the revenue that collecting sales taxes on online purchases would bring into their coffers. For the most part, though, the online retailers have been able to resist efforts to expand state taxing power, and they have been aided greatly by the Supreme Court’s 1992 decision in Quill v. North Dakota, wherein the Court stated that states may not impose sales taxes on businesses that do no have a physical presence in the state. The Court did say that Congress could grant states authority to impose sales tax to businesses not present in the state via legislation. For years, traditional retailers have fought to try to get such a bill passed with very little success. Now, it seems, they are closer than they’ve ever been before:

WASHINGTON — It has been labeled a tax grab and a bureaucratic nightmare by conservative antitax activists, an infringement on states’ rights and a federal encroachment on the almost-sacred ground of Internet commerce.

Yet legislation to help states force online retailers to collect sales taxes easily cleared its first procedural hurdle on Monday evening, and even its fiercest opponents are looking to the House for a last stand. The Senate voted 74-20 to take up the legislation for debate and amendment.

“I’m not above believing in miracles,” said Dan Holler, a spokesman for Heritage Action, the activist arm of the conservative Heritage Foundation, which has made opposition to the Internet tax bill a “key vote” — so far with little impact.

The bill, known as the Marketplace Fairness Act, is that rare piece of legislation that has turned Democrat against Democrat, Republican against Republican and business against business, while uniting states as different as New Hampshire, Montana and Oregon — which have no sales taxes — against virtually every other state.

An odd confluence of events has swung the political momentum to one side. Less than a week after the Senate could not muster 60 votes to expand gun background checks supported by a vast majority of voters, lawmakers from both parties are poised to steamroll opponents and greatly broaden the imposition of sales taxes on the Internet.

Under the bill, online retailers would collect an estimated $22 billion to $24 billion that now goes uncollected. A final vote is expected in the Senate by the end of the week. When the House will take up the issue is uncertain.

“We think this is inevitable, with states looking for revenue, with the growth of e-commerce,” said Stephen Schatz, a spokesman for the National Retail Federation, which has said for years that brick-and-mortar retailers were at a competitive disadvantage against online giants.

“Inevitable” is not a word used often for legislation that Grover Norquist’s Americans for Tax Reform mobilizes against and eBay rallies millions of its users to oppose, as they have with this bill. But sometimes the stars align. State and local governments are pleading to lawmakers to help fill their budget holes with legislation that technically does not raise a penny in federal taxes.

“What it means is a lot of money for states and localities,” Senator Richard Durbin, Democrat of Illinois and one of the bill’s champions, said on Monday.

Old-fashioned retailers are going bust, leaving towns marred by vast, empty storefronts. Those that remain complain of “showrooming,” when shoppers inspect their wares, then leave the store to buy the same products on the Internet, finding lower prices and avoiding sales taxes.

Republicans including Senators Mike Enzi of Wyoming and Lamar Alexander of Tennessee are as adamantly in favor of the bill as Democrats.

Finally, Senate Democratic leaders needed a bill to move to quickly after gun legislation all but died last week, and the Internet tax bill was ready.

President Obama on Monday threw his support behind the bill, which the White House said “will level the playing field for local small business retailers that are in competition every day with large out-of-state online companies.”

The bill would allow states to require all Internet sellers to collect sales taxes for the state and local governments of the buyers. State governments would be required to provide software free to Internet retailers to calculate sales taxes. Online retailers with out-of-state sales of less than $1 million a year would be exempt.

Opponents predict a bookkeeping nightmare. Online retailers would have to keep track of more than 9,000 sales-tax regimes. Internet companies in states with no sales taxes — Montana, New Hampshire, Oregon and Delaware — would have to build a collection apparatus from scratch.

Senator Ron Wyden, Democrat of Oregon, called the legislation “a targeted strike against the Internet and a targeted strike against the digital economy.”

Many of the largest Web retailers have already begun collecting sales taxes. Amazon.com has joined a vast constellation of brick-and-mortar retailers in collecting taxes, leaving eBay to fight an increasingly lonely battle. In March, the Senate held a test vote of sorts, a nonbinding amendment to the Senate budget that mirrored the Marketplace Fairness Act.

On the policy argument itself, John Donohoue, the CEO of E-Bay, argues that allowing states to tax Internet sales would impose huge burdens on small businesses:

The trouble with the bill is that it treats mom-and-pop businesses the same way as it does multibillion-dollar retailers. Yet a small business with a dozen employees simply can’t be lumped in with national behemoths such as Amazon and retail chains that have warehouses and stores around the country. The Marketplace Fairness Act should include an exception for small businesses. Why? Because otherwise an unfair burden will be placed on them.

Today small businesses that operate online are responsible for collecting sales taxes on purchases made in the state where they are located. That is fair. But the proposed bill would require them to collect sales taxes on behalf of every state where they make a sale. That would make it difficult, if not impossible, for them to succeed.

While compromise seems like a foreign concept in Washington these days, eBayis advocating a simple solution. Small businesses with fewer than 50 employees or with less than $10 million in annual out-of-state sales should be exempt from the chore of collecting sales taxes nationwide. These are reasonable exemptions, equivalent to other federal standards, such as those set by the Affordable Care Act and the Treasury Department’s Office of Tax Analysis.

(…)

This isn’t a debate pitting the Internet against Main Street. This is about big retailers, like Amazon, trying to undermine small online businesses. Amazon supports the bill, while at the same time it negotiates local tax exemptions across the country where it builds warehouses. Small businesses don’t have that kind of bargaining power.I believe that Congress would not want small businesses to become the collateral damage in this debate. Many of the largest and most renowned companies in America began as small businesses.

Enabling small businesses and entrepreneurs to grow, and giving consumers across the country and around the world the opportunity to connect with them, is at the heart of what we do at eBay. We want to continue this tradition and make it possible for small businesses to keep their virtual doors open, so that they can compete in the marketplace, grow into bigger businesses—just the sort that should be subject to the Marketplace Fairness Act.

What you’ll notice here, of course, is that Donohoe has essentially conceded the policy argument in favor of sales taxes on internet purchases, he’s just arguing that the exemption that Congress grants to small businesses, which currently stands at $1,000,000 of annual out-of-state sales. Now, perhaps there is a good policy reason for a higher exemption level, I’ll admit to not being well enough versed on the economics of internet businesses such as those operated through E-Bay. However, it strikes me that a $1,000,000 per year limit is not unreasonable and a limit as high as $10,000,000 a year may be too high. At the same time,, the logistical argument is not one that should be dismissed easily.

At the very least, we live in a nation where there are 46 separates sales tax jurisdictions (five states — Alaska, Delaware, Montana, New Hampshire, and Oregon — have no sales tax and the District of Columbia makes 46) and in many cases there are jurisdictions inside those states that impose their own additional sales tax. Computing sales tax for a customer in Buffalo, New York, for example, is different from computing if for someone who lives on the Upper West Side of Manhattan because New York City has its own city sales tax, as do many major American cities. For a small business in Arizona to keep track of all of that, and all of the changes that occur on an annual basis, isn’t exactly an easy task. The bill attempts to deal with this problem by requiring states, and presumably other taxing jurisdictions, to provide software that would calculate sales tax for them. How exactly this is going to be accomplished is unclear. Would retailers have to have 46+ different computer programs? And, how would these programs integrate into the storefront that these businesses have set up on the Internet to ensure that sales tax is correctly calculated when a purchase is made? These problems may be solvable, but I can see a case for how they would be an enormous headache for a business that doesn’t necessarily have a dedicated IT department to handle all of this for them.

Technically, of course, sales taxes on items purchased are still owed even when they are not collected by the retailer. Under the law of most states, residents are supposed to report on such purchases as part of the annual state income tax return as a “Use Tax.” In reality, of course, few people actually do this and states do not engage in much of an effort to enforce the law in this area outside of cracking down on people who try to avoid paying what is actually called a “sales and use tax” on high dollar items. The advantage of having retailers collect the tax, then, is that states can be far more assured that they’re actually going to get the money and, since retailers typically pay these taxes on a monthly or quarterly basis, there is a much more even cash flow into state tax coffers. The question is whether this convenience to the states is good enough reason to impose a new obligation on online retailers. Jordan Weissmann argues that it is:

[M]ost Americans like smooth roads and safe streets. And outside a few royal blue states these days, income taxes are anathema to most voters. Practically speaking, there just isn’t much upside to letting the web cut a growing hunk out of state budgets each year.  Nor is there a good reason to give online retailers a baked-in price advantage over businesses that operate and employ people locally.

(…)

Ultimately, we’re talking about a piece of legislation that would make relatively large businesses adopt some software to collect taxes that the law says are already owed, but rarely paid. In the process, it would make sure state’s don’t needlessly lose much needed revenue as eCommerce inevitably grows and that real-world retailers have a fair shot competing with their online counterparts. Again, this is as much common sense as you’ll ever find on Capitol Hill.

On the other side of the aisle, The Wall Street Journal has a more pointed attack on the Marketplace Fairness Act:

Mr. Enzi’s Marketplace Fairness Act discriminates against Internet-based businesses by imposing burdens that it does not apply to brick-and-mortar companies. For the first time, online merchants would be forced to collect sales taxes for all of America’s estimated 9,600 state and local taxing authorities.

New Hampshire, for example, has no sales tax, but a Granite State Web merchant would be forced to collect and remit sales taxes to all the governments that do. Small online sellers will therefore have to comply with tax laws created by distant governments in which they have no representation, and in places where they consume no local services.

Meanwhile, New Hampshire’s brick-and-mortar retailers will bear no such burden. They will not be required to collect taxes on the many customers who drive across the Maine and Massachusetts borders to shop in New Hampshire. Bill sponsors say it would be too big a hassle to force traditional retailers to ask every walk-in customer where they live, but these Senators are happy to impose new obligations online.

The Enzi plan would require a centralized tax collector for each state or for a group of states that would gather both state and local levies from the online merchants. His office concedes that could still mean 27 or more different auditors of a Web-based business—which is better than 9,600 but hardly qualifies as simplicity.

(…)

So big business and big government are uniting to pursue their mutual interest in sticking it to the little guy. Any Internet seller with more than $1 million in annual sales would be forced to serve all of the nation’s tax collectors. It’s true that many small brick-and-mortar retailers in states with sales taxes support the Enzi bill. They say they’re at a disadvantage as customers examine products in their showrooms and then go home to buy them tax-free. On the other hand, some customers use retail websites for research before buying at a local store.

This is a pretty standard conservative anti-tax argument, but what’s interesting is that the Marketplace Fairness Act seems to be one where traditional political labels don’t really apply. Senator Enzi is one of the more conservative members of the Senate’s Republican Caucus, and yet he’s been out front on this issue for some time now in favor of authorizing states to tax internet sales while, at the same time, one of the Senate’s most liberal members, Ron Wyden of Oregon, is on the opposite side fighting against an expansion of state tax authority. Outside the Senate, Arthur Laffer, the father of the famous Laffer Curve, penned an Op-Ed in the Wall Street Journal last week arguing that authorizing states to impose taxes on internet purchases would help to spur economic growth. Because of this, and given the lopsided vote in favor of invoking cloture on this bill yesterday, it seems pretty clear that the bill is going to pass the Senate, where it goes from there is another story.Eventually, though, I’d argue  that the days of tax-free internet shopping are coming to an end rather quickly. It may not happen this year, but eventually something akin to the Marketplace Fairness Act will pass.

FILED UNDER: Congress, Economics and Business, Taxes, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Mark Buehner says:

    Ultimately, we’re talking about a piece of legislation that would make relatively large businesses adopt some software to collect taxes that the law says are already owed, but rarely paid.

    And if anybody knows how to produce some simple software to collect your taxes, its 50 different state tax bodies. What could go wrong?

    By the way- this article didn’t even mention that different states collect or exempt different items. Some states tax freight, some dont. Some tax labor. Its a total mess. Brick and mortar stores are responsible for 1 tax rate. This bill bill make internet stores responsible for tracking, recording, reporting, and paying 9600 (although ‘only’ mailing them off to 50 addresses). A school district in Texas changes their tax rate are you gotta know about it.

  2. Ron Beasley says:

    Amazon suggested a few years ago a uniform sales tax on internet purchases. No matter the state all purchases would be taxed at the same rate.

  3. Caj says:

    It may well be inevitable, but it is high time Wall Street was also taxed on every transaction it makes! It is going gangbusters but it never seems to have any penalties placed upon it where added revenue would help the country. Wall Street flourishes but Main Street always pays the price.

  4. Gromitt Gunn says:

    @Mark Buehner:

    1. Many states already have a centralized office responsible for collecting all sales taxes within the state and then remitting them to the various counties, municipalities, and taxing districts within the state. In Texas, to use your example, the State Comptroller’s Office is the sole sales tax collector for the entire state and districts are required to inform it any rate changes in advance (or they don’t get their money). It will not be an especially onerous task for most states to publish a real-time update of its sales tax rates by address – the information is already being collected.

    2. TurboTax, H&R Block, etc., already have the infrastructure in place to calculate multi-jurisdictional tax regimens. ADP already calculates payroll taxes and withholding for multiple jurisdictions. And – most importantly – the QuickBooks Point-of-Sale module *already* calculates sales taxes across the country with rate updates as one of its selling points. It will not be onerous for one or more of these businesses to develop products that translate their exsisting expertise to online sales portals.

    3. E-commerce platforms already integrate information such as variable shipping rates based on ZIP codes and courier, local sales taxes based on ZIP code, etc. Calculating sales taxes for multiple jurisdictions just involves a little bit of coding and access to a database that keeps track of rates.

  5. Gromitt Gunn says:

    Ugh, this portion from the Wall Street Journal is simply untrue:

    Meanwhile, New Hampshire’s brick-and-mortar retailers will bear no such burden. They will not be required to collect taxes on the many customers who drive across the Maine and Massachusetts borders to shop in New Hampshire. Bill sponsors say it would be too big a hassle to force traditional retailers to ask every walk-in customer where they live, but these Senators are happy to impose new obligations online.

    New Hampshire agreed over two decades ago to collect and remit sales taxes on purchases where it could determine that the resident lived in a bordering state with a sales tax. For many purchases – anything where you “cash and carry,” for example – they do not collect. However, any purchases that are delivered and/or installed (furniture, electronics) as well as cars, motorcycles, RVs, and watercraft, New Hampshire does collect sales tax and remit it to the state of residence.

  6. Argon says:

    It’s not technically difficult to collect state-specific sales tax on online purchases. Companies with an physical presence across various states already do that. And this stuff gets delivered through infrastructure that our state taxes help build.

    Yeah, there are cross-border issues when people buy in one state and drive their purchases home. However, that’s a separate problem and not a reason for collecting no sales taxes for internet purchases.

  7. grumpy realist says:

    The fallacy is assuming that on-line mom-and-pop stores code their own software. They don’t. They sign up for one of the many services out there that provides an electronic storefront on a web-page.

    We could simply require that all changes in local sales tax charges be posted to a central clearinghouse, Any service providing electronic storefronts would simply update its own database regularly–say, once a month and send an email to any of its clients outlining any changes that took place.

    Honestly, this isn’t as complicated as the anti-tax zealots make it out to be.

  8. Argon says:

    @Gromitt Gunn: Said it better than me. Cheers, Gromitt!

  9. john personna says:

    There is no logic to a *local* internet sales tax.

    If revenue is being lost, do the efficient thing. Put a flat 5% national [internet] sales tax, and then kick it back to states based on population. This might result in a small transfer to poor but populous states, but that’s no big.

    OTOH, requiring an internet “hot sauce shack” to know the regional tax for every shopper is madness.

    @grumpy realist:

    I would submit that you have created a “rent” for such software providers.

  10. anjin-san says:

    @ Mark Buehner

    I suggest you look up “business logic”, get informed, and get back to us.

  11. john personna says:

    Just to remind, a local sales tax supports a large number of local services which make local business safe and practical. You need roads, parking, public safety, good water, power, and sanitation. All those things have local cost-benefit analysis behind them, and drive the tradeoff between high-tax high-service and low-cost low-service.

    In contrast, the internet needs electricity and a data connection. The service framework is much more limited.

  12. john personna says:
  13. Rob in CT says:

    I think the brick and mortar businesses have a perfectly legit beef here, and I’ll be happy to see this resolved.

    I see the objection about complexity, though I don’t really see how software that calculates the appropriate tax based on billing zipcode is all *that* hard. I bought something recently online from a retailer that seems to have it figured out (Walmart).

    Regarding a national sales tax… that happens to be an efficient solution for this particular problem, but opens up other problems.

    Anyway, the status quo is not a good one.

  14. PD Shaw says:

    @john personna: I agree, or at least I would not start with an assumption that the correct tax rate for internet sales has to be the same as non-internet sales.

    I also wonder about enforceability issues. Sales tax compliance can be spotty. How is a state supposed to easily monitor and enforce compliance in other states?

  15. Gromitt Gunn says:

    @john personna: I disagree. I don’t think ADP is engaging in rent-seeking with its payroll services, yet many business choose to use them rather than keep payroll processing in house, especially multi-jurisdictional business. This is analagous – the states (per the article) will have to provide software for free to e-commerce businesses. However, many businesses will probably choose to pay a licensing fee for a module that fits into their existing ecommerce platform and promising regular updates because it will be easier and more cost-effective.

  16. Rob in CT says:

    @john personna:

    JP, it seems to me Amazon needs good roads (at the very least) too. More even than local businesses, in the case of roads, since they ship everything. Reliable electricity is clearly an absolute necessity as well. The others get more abstract, I’ll admit. But roads & power are utterly essential to Amazon.

  17. anjin-san says:

    I think the brick and mortar businesses have a perfectly legit beef here, and I’ll be happy to see this resolved.

    I’m inclined to agree. Ecommerce is a mature platform, adding sales tax to the mix will not damage it at this point. A level playing field makes sense.

  18. john personna says:

    @Rob in CT:

    Well, if trucks bought gasoline that paid for roads, everything would be tidy.

    And that song you bought for your iphone, which did not consume any physical resources, would not pay for them.

    @Gromitt Gunn:

    ADP automated an existing world of complexity. I’m sure they could have suggesed a more efficient system, but that was not their purview. On the other hand, here we are talking about forcing that old world complexity into a new domain that has no need for it. Consider:

    Sales taxes set to rise in many California cities

    Do you know that many us have sales taxes that vary by city?

    Given that it would be a much bigger job than “programming once.” Someone would need to monitor all those tiny localities and program their tax changes (down to the “midnight” transitions) into a national internet tax system.

    Madness.

  19. Gromitt Gunn says:

    @PD Shaw: States already audit sales taxes across state lines. Texas (I use it since it is the State government I know best) has remote auditor teams stationed in Illinois, New York, and California. And a couple of years ago, I interviewed for an auditor job in Dallas doing sales tax audits for the State of Florida.

    It wouldn’t surprise me if states signed onto some sort of regional consortium that would conduct sales tax audits on behalf of all of the states in the consortium.

    I will say that I do agree that a flat sales tax on online purchases might make sense. Whether or not it is feasible (politically or otherwise) is a separate question. And I wonder what then happens with orders that are transmitted online but either involve you picking up the order at a store location (which seems to be a trend with bix box retailers) or are ordered and delivered entirely within state lines (such as pizza delivery).

  20. Gromitt Gunn says:

    @john personna:

    Do you know that many us have sales taxes that vary by city?

    Scroll up to the fourth comment on the thread. If you want to engage in a back and forth, at least read everything I’ve written on the thread.

  21. john personna says:

    @anjin-san:

    Consider the ringtone. You can buy it online, or at Radio Shack.

    When Radio Shack wants local sales tax charged, who is placing the artificial burden?

  22. john personna says:

    @Gromitt Gunn:

    I asked a rhetorical question in order to emphasize the meaning of my link.

    This would not be a one-time programming effort.

    This would be a rent and a requirement that “sales tax services” track the legislation and impact dates down to the city.

    Waving it away does not make it sensible or efficient.

    It is incredibly stupid,

  23. Ben says:

    I find it strange that no one is making the policy argument at all, we’re only arguing about logistics. Let’s talk about the real-world implications to consumers.

    This is going to amount to quite a large tax hike (at least as large if not larger than the expiration of the payroll tax holiday) for people like me who do a lot of shopping online. And sales taxes are among the most regressive taxes that exist. Most of the low/low-middle class people I know buy a lot of their essentials online.

    I know that a lot of people will argue that this isn’t a hike, because these taxes were supposed to have been paid all along by the buyer. But no one was paying this tax. Now they will be forced to. A long-unenforced tax that suddenly gets enforced is functionally equivalent to a tax-hike. This is going to hit the poor and middle classes very hard.

  24. Gromitt Gunn says:

    @john personna: Why are you intentionally ignoring the fact that this is already being done? Quickbooks already does this for sales taxes? ADP, TurboTax, etc. already do this for state and local income taxes and other withholdings. E-commerce modules already exist that track multi-jurisdictional factors such as shipping and sales taxes.

    This wouldn’t add anything new. And for a business that wanted to keep it all in house, they can just use the state-supplied versions that don’t carry a licensing or usage fee.

  25. PD Shaw says:

    @Rob in CT: This information is a a bit dated (2001-2002), but it reports that local governments on average were spending 5.5% of their budget on transportation, Link, and they are spending more of their local budgets on education, police and fire, and social services.

    In my state, about 20% of the state sales tax is given to local governments in proportion to their population. I suspect those cities/counties with additional sales tax are probably spending it on schools one way or the other.

    @Gromitt Gunn: There was a story a few years ago in my state in which the Attorney General was claiming that about half of the retail taxes on gas sales were not being paid. I asked someone familiar with the industry who said he wasn’t surprised; I won’t get into his explanations, but it makes me wonder about how difficult compliance is in this area.

  26. john personna says:

    The stand out message should be that advanced nations are facing the great stagnation, and need every edge they can get in generating new growth and new wealth.

    We should be innovating here, and not legislating retrograde inefficiencies.

  27. Gustopher says:

    For years, whenever this subject came up, Amazon.com would complain about the complexity of all the different sales tax rates. They also ran Target.com during that time and actually were calculating all of those sales taxes (Target has a brick and mortar store in every county or so), and it really wasn’t so hard. They were simply lying.

    It’s nice that they are finally backing down from this absurd position. Looking up entries in a small database is something computers are good at.

  28. john personna says:

    @Gromitt Gunn:

    Did you miss MY link above? I’ll repeat it for you:

    Tax preparers lobby heavily against simple filing

  29. john personna says:

    @Gustopher:

    It’s nice that they are finally backing down from this absurd position. Looking up entries in a small database is something computers are good at.

    You know what would really happen. Some small number of providers would be able to afford the data collection, at the front end, and would set up for the distribution of funds to various entities. They would charge a skim from any small business to handle data collection, tracking, and payment.

    Stop for a moment and consider Kickstarter.

    You understand that every Kickstarter funder (legally a pre-order of goods) would have to provide a physical address for tax processing?

  30. john personna says:

    (To make our economy fly, we should be streamlining things like Kickstarter or Etsy and not burdening them.)

  31. Gromitt Gunn says:

    @PD Shaw: That wouldn’t surprise me at all. The smaller an outfit is, the less likely they are to be compliant, out of a combination of ignorance and wilfully flaunting the law, and materiality. There are a lot of mom and pop gasoline retailers, so even if you do a full audit of an accurate statistical sample of the population of mom and pops relative to the collective overall contribution to the estimated gas tax, each individual mom & pop is much less likely to be audited than the retailers that collectively make up the top 30% (or so) of total gas tax collections.

    I’m sure it is worth it to the mom & pop’s to flaunt the gas tax collections. Gasoline is a high-volume, low-margin product – the average profit per gallon is a couple of cents – so padding your bank account with the $0.60 per gallon (or whatever your particular state plus federal rate is) is a huge windfall, even if you underrreport by, say, 10%, you’ve still more than doubled your profit margin.

  32. Snarky Bastard says:

    @john personna: You think that type of work is difficult — hells no, ask any major medical claims system vendor if monitoring several thousand base codes with numerous local exemptions, exceptions, add-ins etc — maintaining a national sales tax database with municipality level differntiation and date spanning and product level differentiation is fairly simple.

    Esp. if there is a $1,000,000 or $10,000,000 annual sales exemption… technically it is an expensive one time crash project and then data maitenance. Not that big of a deal.

  33. Gromitt Gunn says:

    @john personna: No, I didn’t ignore it. I simply don’t see the relevance. In order for your link to be relevant to state and local governments, you would literally have to argue for anarchy – that state and local governments no longer had taxing authority.

  34. grumpy realist says:

    @Ben: So because there’s been a whole lot of tax evaders, you’d prefer to leave the system as is? Sounds silly.

    Maybe brick-and-mortar stores should charge an exit fee for anyone who doesn’t buy anything, just to avoid the “looking, then buying online” dweebs.

    Start eating your spinach, boys and girls. Internet sales taxes are going to show up at some point. Get used to it.

  35. grumpy realist says:

    Hell, I have to deal with all the filing requirements of patent offices all over the world, ditto for all the trademark offices all over the world, and don’t have a problem.

    If you can’t deal with handling on-line charging of taxes, maybe you shouldn’t have an on-line store.

  36. Ben says:

    @grumpy realist:

    All I said is that no one seems to actually be talking about the impact this is gonna have on consumers. Which is going to hit the lower and lower middle classes the hardest. You didn’t address that point at all.

    Yeah, everyone was evading that tax. For over a decade. Now they’re going to enforce it. That’s a tax hike, in any functional way. And it’s a tax hike that is going to be primarily centered on the lower classes. Why is no one talking about this.

  37. Gromitt Gunn says:

    @Gromitt Gunn: Downrating a post for pointing out that a question has been answered before it was asked is about as pathetic as Tsar N, Bithead, and JKB in a cage match with S-D as the announcer and Jan holding the signs in her daisy dukes.

  38. john personna says:

    Too many people are invested in a false dichotomy. The only two choices are not “no tax or an inefficient mapping of local taxes to a virtual domain.”

    I proposed a uniform cyber sales tax.

    I don’t think you can argue that no tax, or archaic community sales taxes, are actually better, more efficient, or more felicitous to innovation.

  39. john personna says:

    @Gromitt Gunn:

    Well, why do you think Congress is not considering a uniform cyber sales tax, as they have in the past?

    Who would lobby for simplicity?

    Who would lobby for complexity?

  40. Rob in CT says:

    Ok, let’s talk about that. It is, functionally, a tax hike. How big? Do we have numbers on the total sales currently not charging sales taxes (note: not total internet sales, because some such sales *are* calculating sales taxes)?

    If we know that, we can estimate the tax hit and if we know that we can estimate the hit to GDP (after we argue over the appropriate multiplier).

    As to the hit for the lower/middle classes I, for one, wanted further extension of the FICA cut. That would blunt this. But it wasn’t done, in favor of austerity measures. I’d be happy to see it re-introduced. I don’t think that’s gonna happen, though.

  41. Rob in CT says:

    @john personna:

    I’m generally in favor of standarizing things, so I’m not in principle opposed to a federal-level internet sales tax (distributed back to states in some manner, likely by pop as you propose). Of course, states that want higher or lower levels of taxes aren’t going to like that, are they?

  42. Gromitt Gunn says:

    Okay, this is 1000% percent off-topic, but it just happened and it is *hilarious* from a ‘state and local government” perspective.

    http://www.statesman.com/news/news/texas-house-votes-to-end-state-lottery/nXTxX/

    The Texas House just voted to kill the Texas Lottery Commission. By accident.

  43. Rob in CT says:

    I’ll add to that the fact that I think a lot of the complexity that businesspeople complain about comes from dealing with multiple layers of rule-makers (local, state, federal). The problem is that to the extent you wish to cut down on that, you run smack into Federalism.

  44. john personna says:

    @Rob in CT:

    Shop owners in states with low sales tax will love it, and it might serve as an incentive for other localities to keep their sales tax in check. Given that sales taxes are regressive, and burden the poor more than the rich, that might not be so bad. (I have never been a VAT supporter.)

  45. Gromitt Gunn says:

    @john personna: I’m not aware of past efforts. My guess is (with the caveat throughout that IAKAL) that proponents realized that it would run afoul of constitutional issues since – if the proceeds are distributed back to state and local governments – it would amount to double taxation.

    As has been pointed out, sales and use tax is owed currently on internet purchases at the prevailing rate, it just simply has never been collected for the most part. If you create an national online tax that is not distributed downward in some proportionate manner, then you are creating an additional (collected) sales tax on the books on top of the existing (mostly uncollected) state and local sales taxes. However, if you were assess a national tax that is then distributed downward in a proportionate manner (and therefore, the federal government is simply a transfer agent and not the taxing authority), you are effectively doubling (approximately) the state and local sales taxes.

  46. john personna says:

    @Gromitt Gunn:

    Pfft. Perhaps there was a political battle and “resident states” won.

    If you wanted to be serious and map the mess of sales taxes into a virtual world, you’d need a two-part equation, and split the spoils between buyer’s state and seller’s state.

    I mean, if I own hot sauce shack in California, and I sell to someone in Oregon, I pay no sales tax on the transaction, purely because they (and not me) are in Oregon.

    That really is an inverse version of the whole idea of taxes to support local services and business.

  47. john personna says:

    As a further aside, note that a $1,000,000 per year exemption just pushes more business to eBay storefronts. They already have 1001 “stores” selling the same Chinese flashlight, etc.

  48. grumpy realist says:

    @john personna: And half of them are selling counterfeits anyway….

    (We’re dealing with a whole lot of fake stuff being ordered over the internet from China. Considering the number of sites out there, we’re scratching our heads trying to figure out how any of them make money.)

    Oh, and standardization of internet sales taxes? Wonderful. Be my guest. Try it. I predict who ever tries it will be stomped into a miniscule grease spot by all the “local authority” types. AND the Tenth Amendment types.

  49. grumpy realist says:

    @Gromitt Gunn: It looks like they voted to authorize it again. A reverse-oopsie.

  50. john personna says:

    @grumpy realist:

    I was actually speaking of the small stuff that doesn’t pretend a brand.

    Relatedly, there is a neat article on Netflix here

    During peak periods of internet use in the US, Netflix constitutes 33% of all downstream traffic, which means content that goes into the device instead of out, according to broadband network provider Sandvine (pdf). That’s more than Google’s YouTube (14.8%), BitTorrent (5.9%), Apple’s iTunes (3.9%), Amazon Video (1.8%), and Facebook (1.5%), among others. Netflix isn’t as dominant in mobile internet use, where it has just 2.7% to YouTube’s 31%, but that’s the next battleground..

    I presume that many of you have been fooled into thinking that Netflix should be charged local sales tax, to “level the playing field” with the local cineplex?

  51. Tyrell says:

    Strange that tax reform gets little or no attention. One good idea is to do away with federal income taxes and have a national sales tax of 6% on everything, with certain items exempt: medicine, food, educational materials. Non-profit groups and of course churches would be exempt.

  52. john personna says:

    @Tyrell:

    I’m afraid the math doesn’t add up. To collect an amount similar to the income tax we’d need something like 20 percent tax, including on food and rent:

    Some proponents of retail sales taxes have advocated exempting food, medical care, and housing from a sales tax on the grounds that low-income families spend a higher percent of their income on these items. Feenberg, Mitrusi, and Poterba show that exempting these three items would raise the sales tax rate from 17.2 percent to 30.3 percent.

  53. grumpy realist says:

    @Tyrell: Why should churches and non-profit groups be exempt?

    Yah, I know, I’m just living up to my moniker.

  54. pigtail says:

    Here’s the problem that no one is noticing. Once taxes are enforced for online purchases, the benefit to ordering goods over the internet ceases to exist. People will stop ordering on the internet. Why pay for the item, tax and delivery costs? It would be of absolutely no benefit to the consumer. Thus, the companies who exist solely because of the internet will lose a tremendous amount of sales, and this will add to the unemployment problem, and actually will INCREASE pressure on the states, not decrease it. I can’t believe no one is picking up on this problem. Is the media controlled or what? Doing this at this particular point in time, when unemployment is so high already, is very problematic. I really hope this doesn’t pass the house at least, and I have no economic interest that colors my opinion.

  55. Tyrell says:

    Yes, this is a great point. Because then you would have just a mail order electronic catalog. I don’t think many people mail order from catalogs like they used to.

  56. Sean says:

    The States cannot collect their use taxes so they require businesses to do it for them. I don’t support this plan at all but if they were going to do it they should at least let the businesses keep 1% of it for the time and cost in processing and submitting all these returns.

    They should also simplify to one or two rates nationwide.

    That’s what is simple but that’s not how government works. They do whatever makes them more money regardless of how complicated it is.

  57. fred says:

    Here we go again folks. Pres Obama sticking it to working class and poor folks again. He says he will sign an internet sales tax law. He never even discusses a transaction sales tax for Wall Street where they buy and sell stocks. Another example that he just cares about the rich and corps. The Pres does not even talk about JOBS anymore…Where are the jobs Mr President? Every day many of us keep asking ourselves why we voted for this man twice. He just does not seem to care for working class and poor folks.

  58. john personna says:

    @pigtail:

    Seriously? Maybe I’ve already compartmentalized my on and off line shopping, but the things I buy online are not going to be more expensive than local products even with a tax.

    Take those flashlights above. 7 keychain led lights for a total of $5.09.

    If I needed a flashlight I might pay more locally, or I could buy those 7 and throw them in a drawer.

  59. gVOR08 says:

    @john personna: I’d support some sort of national reform, say replacing local sales taxes with a national VAT with a share going to states and localities per some formula. However, until then, even if Amazon doesn’t, the citizens of our cities still need

    roads, parking, public safety, good water, power, and sanitation

    but our cities are losing funds to support them.

  60. gVOR08 says:

    @pigtail: I’m sure that the next time I consider paying $5 shipping on a $10 book, a $0.60 sales tax will make all the difference and persuade me to buy the book at my local B&N instead. Where the effect on GDP and employment will be pretty much the same as if I had bought from Amazon.

  61. Rob in CT says:

    Shop owners in states with low sales tax will love it, and it might serve as an incentive for other localities to keep their sales tax in check. Given that sales taxes are regressive, and burden the poor more than the rich, that might not be so bad. (I have never been a VAT supporter.)

    Well, only to the extent that those “low tax states” don’t presently have sales taxes lower than the new spiffy federal rate. Those that do will hate it. Those states w/higher state sales taxes will be annoyed. I’m not saying this is all bad. I’m pointing out a potential obstacle.

    If you attempt to federalize this, states-rights types may fight it on general principle. On the Right, it will be “ANOTHER TAX!” and on the Left it will be about the impact on the working/middle classes (as has been pointed out, it’s a de facto tax hike, and a regressive one at that).

    If you sat down today and tried to design a tax system from scratch, you’d probably have a nationalized sales tax if you were going to have a sales tax at all. So again, I’m not really opposed to your argument. I *am* opposed to the status quo, in which Amazon doesn’t collect sales taxes and thereby gains a competitive advantage over other businesses that do.

    Like any reform effort, the tear it down and replace it with the optimal solution option probably isn’t viable.

  62. Sean says:

    It comes to more than just the $10 item you would buy. We have companies who purchase $200-500 orders online. That would be $14-35 more for just that one order in NJ, or $20-40 more in some California cities. Add that up among 1000 businesses and they are paying $14,000-35,000 more in taxes. These are small businesses, the same mom and pop shops that the gov’t is saying would benefit.

    In addition, as a consumer, you have to file taxes once a year. As a business you have to file monthly or quarterly to each state. Now imagine going from filing one complicated state return each month to 46 of them each month! You would be spending one week a month just filing returns.

    If they really want this to happen they have to eliminate city and county taxes and simplify the code so there are fewer rates and it’s easier to process.

  63. Sean says:

    Some people are arguing the states need the money to pay for roads, police etc. So what exactly are the tolls on public highways paying for? What exactly are property taxes paying for? What exactly are state income taxes paying for? AND why aren’t you submitting your use tax to your state if you are complaining? Why should businesses collect that because you are too lazy to report and submit it yourself?

    If we had one tax only your arguments would be sound but when you consider how many taxes we have you cannot possibly argue that states don’t have enough money already.

    Look at the figures: $22-24 billion would be collected for states. $200 billion just promised to Egypt for aid. Ummmm I think we would be better off just not giving away free gifts to other nations than causing undue burden on our businesses.

  64. wr says:

    @pigtail: “Once taxes are enforced for online purchases, the benefit to ordering goods over the internet ceases to exist. People will stop ordering on the internet. Why pay for the item, tax and delivery costs? It would be of absolutely no benefit to the consumer. Thus, the companies who exist solely because of the internet will lose a tremendous amount of sales, and this will add to the unemployment problem, and actually will INCREASE pressure on the states, not decrease it. ”

    This only makes sense if we assume that the consumer, on discovering that internet purchases are taxed, decides not to purchase the item at all. That may be true of some marginal transactions, but when my dog is hungry, I need dog food, and if I don’t order it from the online source I’ll buy it at a local store. Either way, someone’s getting my money.

  65. john personna says:

    @gVOR08:

    I can understand a stubbornness in transition. When I drive over to the hardware store to pick up an odd or end I use roads, I want parking, and safety, etc. Traditionally that has been paid several ways (and US states split it differently), but property tax, income tax, business fees, gasoline tax, and sales tax have generally applied.

    When I order a flashlight direct from China, by way of eBay, maybe my hardware store, and my mayor, do say “not fair.”

    But I think that’s partly emotional, and a response to a changed world, rather than some rational accounting that my order from China used city services.

    … and of course that whole back-story creates an unnatural precedent for purely virtual services like iTunes or Netflix. What we have are people pushing “not fair” and “shop local” onto things that are long past workable as local shops.

    So given that local services need to be paid-for, I think the way to do it is to tax things that are still local and not gone and virtual. And it’s not like every state thinks they need a sales tax to do these things.

  66. john personna says:

    @Rob in CT:

    As I’ve said in one form or another, Amazon’s sales tax advantage is only just a small part of the picture. Massive online retailers have lower costs per transaction, and that is already the larger effect in the decline in local shopping.

    I mean, it is a natural progression from the local shop, to the warehouse store, and then to the virtual seller.

  67. john personna says:

    (My online purchases were for things at the local fly shop, but the cost structure of the local fly shop* forces him to charge about twice as much for a packet of hooks. Again, adding back sales tax would not move the sale to him.)

    * – no doubt a high cost of inventory for a small outlet

  68. Rob in CT says:

    @Sean:

    Most of your argument is perfectly fair and I agree with it (I’m all for reducing redundancies, like taxing at 3 levels of government instead of one, or taxing multiple activities instead of one). I’d much rather see local & state income/sales taxes go away with a (roughly) commesurate increase in the federal rates (and a commesurate increase in federal-to-state aid/transfers to net it out). Making tax filing worse is not something I want either.

    The gas tax thing is easy to answer: it’s basically never covered the cost of the roads. I would like to see it raised to do so, but there are reasons it hasn’t been.

    I don’t think state income taxes raise whatever they raise. If you want to substitute increases in state income taxes for sales tax repeal, I’m in. Many others will fight that tooth and nail.

    Demanding the individual track their own sales taxes for each internet transaction is even more onerous than it is for businesses. I’d venture to guess that if that was actually somehow enforced [not that it realistically can be], internet shopping would plummet because nobody would want to deal with the tax reporting. That is, the aggregate hassle of all the individual consumers > the aggregate hassle for each business. So basically you don’t actually want that either.

    As for Egypt, we paid off Egypt a long time ago to make peace with Israel. While I’d be happy to end aid to both countries, it’s not actually realistic at this time. Even setting aside the grip Israel has on Congress, we really don’t want to be giving anyone excuses to pick a fight over in the ME.

    JP: I’m not arguing that if Amazon has to collect sales taxes suddenly brick & mortar will come back and Amazon will collapse. Did you think I was? The tax thing *is* an advantage, and an unfair one. If you want to solve that by getting the states to surrender their sales taxes… I mean, I’m for it, but wow, that’s strikes me as a herculean task.

    Also: I really can’t see instituting a federal sales tax rate for internet purchases and leaving the old system in place for brick & mortar. That doesn’t really make much sense.

  69. Multistate SalesTax Guru says:

    I don’t know when the media will ever get the facts correct on this legislation but this is not just about internet sales. It’s about ALL businesses that have more than $1 million anticipated annual revenues and have customers in states where they are not currently collecting sales tax. It is also about sellers with exempt sales collecting the correct exemption certificates from the customers in these other states.
    So your state doesn’t tax services, Connecticut, Ohio, South Dakota and Texas are among the list of states that have expanded their sales tax to several services. Information services, consulting services and data processing services are likely business that will be most vulnerable to huge and unexpected liabilities. So your business fails and you didn’t collect. Most all states have personal liability for officers and responsible persons that fail to collect. Yes the states can and on many occasions have pierced the liability veil to reach out to collect the taxes from individuals when a company is no longer solvent.
    If this legislation passes and you have more than $1 million in gross revenue across all entities of common ownership, you’ll now have to know the sales tax law in all states, not just your home state. The free sales tax software will only do the rate lookup and math, your business will have to apply the law and proper taxability coding to your products. WAKE UP people and see this as more than just paying sales tax on your internet purchases. This is about interstate business being regulated in all states where they have customers. The Marketplace Fairness Act is a water downed version of last year’s Mainstreet Fairness Act because the latter demanded too much regulation and compliance on the states. Supporters of Marketplace Fairness have sold out the marketplace to gain the support needed from states that want sales tax collection but don’t want to compromise on state sovereignty and simplifications to make the system easy enough for small and mid-size business to comply. Once this federal legislation goes into effect it will be a few years and many victimized businesses and individuals punished by the complexity will have little chance to unravel the mess.
    I could say I have the sixth sense to see into the future on this, truth is I have a very elevated understanding of the sales/use tax laws in all 45 states and hundreds of locally administered cities, counties, parishes and boroughs. The straight up fact, it’s much more complicated than a tax rate and cutting 45 checks or mandatory electronic funds transfers. It’s about knowing the fine print in the tax law, due diligence – good faith acceptance of properly completed AND valid exemptions, knowing when customers are inside or outside the taxing limits of ball park finance districts and metro transit districts, knowing delivery charges are taxable because you listed them on your invoice as ‘shipping and handling’, knowing what you think is a document or software communicating your research as a consultant actually meets the definition of taxable information services in your customer’s state . In short, it’s about knowing the sales tax laws of all 45 or more states and refreshing that understanding every time you start a new business line, change the terms of your contracts or have the benefit of your services received by customers doing business in multiple states. And remember, you’re personally liability for unpaid taxes (collected or not) in the event the company is insolvent to pay the liability discovered in audit. WAKE UP media and give the public the truth and full story.

  70. grumpy realist says:

    @Multistate SalesTax Guru: well, duh, aren’t you supposed to pay it now as the customer?

  71. john personna says:

    @Rob in CT:

    I keep reminding that virtual stores do not use local services like bricks and mortar.

    Local shop keepers cry foul, and say it is “fair” if Netflix pays tax just as if they had a video store on main street.

    As I say, I think that is an emotional, and irrational, appeal.

  72. john personna says:

    (On the other hand, the city did have a discussion on how wide that street should be, how much parking was needed, and if “civic renewal” would bring in more customers. They DO know the trade-off between local tax and local services.)

  73. john personna says:

    (That really is a good illustration. A city decides to give a face-lift to the local shopping district, presumably housing shops owned by the city council. They raise sales tax to pay for it. All good if it was taxing local business for local service. But no, the city which sets its own tax rate now gets to collect from Apple, on iTunes sales, and use THAT money for civic renewal.

    A good scam if you can get away with it.)

  74. john personna says:

    Just to rub it in Rob, by your argument, Apple was “cheating” because they weren’t paying for that town’s street widening. As if wider streets sold more iTunes.

  75. Sean says:

    They can let the shipping companies collect the sales tax for ALL the jurisdictions and add it to the shipping cost. They are better equipped to handle the processing AND if they were generous they could let the USPS keep 1% of it. It would be a windfall for the failing post office.

    Now that wouldn’t be too hard on small businesses if they didn’t have to process all those returns.

    Downside is they will say the values are under reported to the shipping companies but they can do some work and audit like they are supposed to now.

  76. Rob in CT says:

    @john personna:

    Rub it in?

    What is it that you think you’re doing here, John?

    Is this some sort of schoolyard thing?

    I see your point about local services being used more by local brick & mortar businesses than by internet businesses (who do not use zero, but certainly use less). Given that and the issues raised by Sean about the filing hassle, I’m even more inclined than before to support a federal-level solution.

    Will you now do some sort of endzone dance?

  77. Rob in CT says:

    @Sean:

    Interesting thought, as a second-best solution. Given the political hurdles to what I think are the first-best solutions (either no sales tax at all, but higher gas taxes and/or income/investment taxes to compensate, or JP’s preferrence of a federal sales tax distributed back to the states), that might be a good answer.

  78. john personna says:

    @Rob in CT:

    That was more of a friendly rub-it-in.

    And I did want to insist, gently, that local governments are misattributing “unfairness” in many circumstances.

  79. Justinian says:

    Just an idea:

    Every quarter, the internet providers would be required to send to each of the fifty states only the information about the transaction. “Such and so, address such and so, did x dollars of business with us this quarter.” The state then would collect all the information, and bill the individual for sales taxes owed, or, alternatively, send a statement to be used at the end of the year on the person’s personal income tax form.

    The idea keeps the retailiers from having to play tax-collector and reduces them to being information provider. Only information crosses state lines. States collect their own taxes. States would calculate how much tax was owed on account of the exact address of the purchaser.

    The idea does have a serious Big Brother problem. Companies, such as purveyors of adult merchandise, would be given the (burdensome) option of not being information providers, by collecting the tax at the time of transaction and remitting it to the states as lump sums.

    I would especially appreciate it if Multi State Sales Tax Guru thought the idea was workable.

  80. For a small business in Arizona to keep track of all of that, and all of the changes that occur on an annual basis, isn’t exactly an easy task.

    I mean, it’s not as if someone could write an app where typing in a zip code returns the relevant sales tax information. This isn’t one of those slam-dunk problems that all internet-based retailers solve easily, like figuring out which of USPS, FedEx, UPS, DHL, etc. etc. gives the best price/performance tradeoff for a package that’s 1’x2’x3′, weighs 4 lbs., and is being shipped from Boston to Flagstaff.

  81. Here’s the problem that no one is noticing. Once taxes are enforced for online purchases, the benefit to ordering goods over the internet ceases to exist.

    Very true. I would immediately stop using Amazon and instead shop at the local bookstore that carries every book that’s in print.