RSR Research: Is it Time to Tax Internet Sales?
By Brian Kilcourse,
Managing Partner
Through a special arrangement, presented
here for discussion is a summary of a current article from Retail
Paradox, Retail Systems Research’s weekly analysis on emerging issues
facing retailers.
On Sunday June 7, the San
Francisco Chronicle published an editorial to say that it’s high
time to tax retail sales on the internet. What
gave rise to this opinion is the fact that California is "broke,
busted, and disgusted," and needs money. With internet sales
approaching 4 percent of total retail sales in the U.S., the e-channel
is no longer just a technical curiosity – it is now a fact of retail
life.
Minnesota, Connecticut,
Illinois, Tennessee, and Hawaii are also considering the issue now. Last
week, the following news item appeared in the Honolulu Advertiser:
"State lawmakers
have sent Gov. Linda Lingle two approaches to get Mainland retailers to
collect and pay taxes on sales from Hawaii. One bill would allow Hawai’i
to join 23 other states in the Streamlined Sales Tax Project to simplify
state tax laws and encourage retailers like Amazon.com to collect and pay
state sales and use taxes. States that have signed up for the project are
unable to require retailers to pay the taxes, however, until Congress passes
federal legislation clarifying it is not a burden on interstate commerce.
The second bill would immediately require Mainland retailers to pay the
state’s general-excise tax if they have an economic nexus in the Islands
through a presence on local Web sites. Local Web sites can get paid commissions
for referring customers to Mainland retailers through links. States are
losing out this year on nearly $7 billion — $36.6 million in Hawai’i —
in uncollected taxes on Internet commerce, according to a study by researchers
at the University of Tennessee."
Given the condition
of the U.S. and states’ economies and the loss of tax revenues during this
recession, the momentum is building across the country to address this
issue. Whether the U.S. Congress will deal with it is an entirely different
matter. As long ago as 2001 (when internet sales only represented about
1.5 percent of total retail sales), 40 State Governors sent a letter to
Congress asking that a 1998 moratorium on internet sales
tax be lifted. But in October 2007, the House of Representatives voted
405-2 to pass the Internet Tax Freedom Act Amendments Act, extending the
moratorium on internet access taxes and other
taxes unique to the internet until November 2011.
RSR on June 23 ran a "quick
take" poll to see what our readers think about the prospect of an
Internet Sales Tax (the results are in the chart below).
Safe to say, colonial
Boston’s Rev. Jonathan Mayhew’s 1750 call for "no taxation without
representation" still rings in many Americans’ ears! The most interesting
data point from this survey is that not one of the 54 people who answered
the question had "no opinion."
Twice as many respondents were adamantly opposed to the new tax as those
who were in favor of it. If our readers are any indication, this issue is
bound to polarize the voting public.
Discussion Questions: Is it time for U.S.
states to tax internet purchases? What’s the
likelihood that such legislation will get passed in today’s economic
climate? What impact would taxes have on e-commerce?
Much as I enjoy buying products on the Internet and not paying sales tax, the Internet is now mature enough to consider taxing purchases. In order to do this, a simplified program needs to be worked out so that Internet businesses can easily navigate the complicated myriad of state and local taxes. Without a way to handle these taxes, most small Internet companies would go out of business simply trying to comply.
That having been said, I don’t think we will see any change in the Internet tax laws until after 2011, if at all. Consumers love a bargain and they like that many purchases on the Internet are tax-free. They will be quite vocal about denying states the right to tax Internet purchases.
It’s going to be an interesting battle.
This should have been done from the start. Levels the playing field for all.
One big reason why this is a bad idea whose time won’t come: It is political suicide. Lawmakers are passing new tax legislation weekly, as they scramble to cover increasing budget deficits. Most target special user groups. This is not only broader, but by definition a group that is addicted to communication. And, 2012 looks to be a big election year–just when the new taxes would be hitting Internet sales? I don’t think so.
Why would we not consider a Federal sales tax only–not have a state sales tax–and distribute the proceeds back to the states for job productions? I see a great deal of “red tape” for each state policing the collection of internet sales tax. A single federal tax would be fair to all and could be “earmarked” (I hate that word) specifically for new jobs and to stimulate employment.
There would have to be a ban on any additional state sales tax to keep it under control. But at least a federal tax would be fair and equitable for all consumers.
I am not a big advocate of increased taxes but at least this would level the playing field for we “brick and mortar’ retailers.
If you are a brick and mortar retailer, you are for collecting sales tax on internet sales as this levels the playing field. If you are an internet retailer, you are against sales tax.
Requiring internet retailers to collect sales tax will slow the growth of internet sales, but that is not the real problem. Each state has its own rate, so one would need a table of rates that must be updated. Some cities also apply sales tax so another table will be needed. On top of all this, each taxing unit has different items and price points as to what is taxable and what is not. This simply becomes a nightmare to online retailers.
Now let’s go to the real problem. Are taxes applied based on the buyer’s home address or the location merchandise is shipped to? If I purchase a present for my sister who lives in North Carolina, what tax laws apply? Clearly both states are not going to get the tax revenue, so how do you decide. What if it is taxable in Connecticut and not in North Carolina? The idea of getting all the states to agree should only take years; after all, the lawsuits.
The more likely scenario is the Federal Government will start taxing internet sales. How else will they pay for their spending addiction?
Reading the comments is interesting indeed. What I see is that like consumers, the readers here do not seem to understand that they owe the sales tax. The law is not that these sales are exempt, but that it is an “unreasonable burden” on out-of-state and national firms to collect them. Indeed. The patchwork of laws on this around the country is what has led us to this.
Sure, it seems that no tax is an advantage for online. Of course, there is the shipping cost but in the end, someone pays to get it physically there.
The issue for e-commerce retailers is the uneven approach. Who can risk taxing if others do not? The answer is no one. On the other hand, the law is pretty clear, someone owes the tax.
The answer is in law, a national law that will provide consistent treatment. This will allow a fair implementation online and end the state by state slow roll.
It seems inevitable. Not only do the states need it, but the law requires it, so it will endure as an issue until resolved. However, we will still have the old states’ rights issues, so this, as it has, takes a…lot…of…time….
No, we don’t need to tax the Internet. How would we ever enforce that? If we had to pay tax, then we might as well just go down to the local store and buy what we were going to buy on the Internet. If people are shopping from home and not wasting gas, they should at least be rewarded by not having to pay sales tax.
Yes, there is a question on whether this can be done. But, the reality is that it should be done. Internet sales are replacing brick and mortar sales and with that, the states are losing revenue. There is no logical reason not to tax those replacement sales. But, like most taxes, the personal mantra is “tax them, not us.”
As an aside, on the radio today, a small business man was ranting and raving on how the proposed taxes to pay for a new healthcare program were going to keep him from expanding his business. When asked “What kind of business do you have?” He answered, “Rehab?” The next question was obvious, “How much of your business comes from Medicare and Medicaid?” The answer, “40%” The U.S. has become a country of wanting all the benefits and not wanting to step up and pay for those benefits.
Unfortunately, much of this is caught up in a complicated and bizarre tax system. What the real solution is a completely simplified system that includes state and federal taxes. But, surely that means that someone will have to pay some tax that they don’t pay now.
Does anyone reading this actually think our government will fix and drastically simplify the tax code? Who’s going to protect all of the phony-baloney jobs the IRS would lose if this really took place, not to mention the CPA lobby?
We are now so dependent on our government to fix everything, all it does is give them more power to build their own golden parachutes. There is no solution, because common sense is not allowed in the halls of Congress, and we cannot stop them from voting every new frightening legislation that is being pushed through right now.
2012 is going to be an interesting year, if we still have any small locally-owned businesses left in this country after we are forced to pay more taxes and health care for everyone. We are in serious trouble, because all levels of government are going broke trying to feed their insatiable appetite. Anyone else have a thought on this, or am I just paranoid?
Yes it’s time for a level playing field for all consumers regarding sales tax on online purchases. Nobody likes taxes, but the online sales tax dodge favors the richest citizens the most, while siphoning away revenues from the states.
The argument that enforcing existing state laws to collect sales taxes online is somehow too difficult or complex is spurious. A digital clearinghouse can handle the process as a Web service, without requiring individual online retailers to track local laws or code their own solutions.
Finally, the jurisdictional issue is another red herring–of course the tax laws of the “ship-to” address must apply. This is a simple principle, and one that won’t cause online retailers to establish their headquarters in the Cayman Islands.
I should point out that I advanced this same argument in a VStoreNews essay in Spring 2000, at which time the Internet sales tax issue was debated in the presidential race between Bush and Gore. After eight years, it is high time we revisited this question.
Of course the online retailers would like to retain this competitive advantage, and of course those always against any expanded or increased taxes will fight this as a “freedom” issue. Why should some consumers have to pay a sales tax, while another consumer avoids the tax on the same type of item? How will states replace the revenues lost as transactions via the web increase?
If you live in a state with an applicable sales tax you should pay without regard to the ordering/delivery method. If you don’t like that sales tax – work to change it for everyone in your state.
I agree – I also enjoy buying products on the Internet and not paying sales tax. The Internet is now mature enough to consider taxing purchases. I’m willing to pay a sales/use tax to be fair but, in order to do this, a simplified program such as a flat rate and a central point to send the collected taxes needs to be worked out so that Internet businesses can do it without scraping their shopping carts. In my own case, it’s more of a side business and if it is difficult to keep up with, I’ll just close the online part of my business.
Three words – “Federal Sales Tax”. The federal government is responsible for interstate commerce. Placing a federal sales tax is perfectly within constitutional limits. A high enough Federal Sales Tax rate combined with eliminating personal income tax and we have a much simpler and more efficient government revenue program.
I have a small online retail business. I have sold my items to people in every state. In my home state, I am registered to collect and pay sales taxes on any product delivered within my State (New York). In NY, individuals are supposed to declare out-of-state purchases and pay sales taxes on them to NY on their annual NYS personal income tax return form. Most States also have this law on the books. Passing this legislation would take this responsibility away from the individual–who the states obviously feel cannot be trusted to pay–and make the retailer responsible for collection and payment of their local taxes, which I feel would be an unfair burden to a small business like mine.
In New York, we have many different sales tax rates. Each county, city, etc, can impose (with approval from Albany) whatever tax rate they feel is needed. Preparing my annual sales tax return isn’t easy because of all the different rates, and everything has to be separated out on the return. For a small business like mine, having to do this–keeping track of the tax rate for every county within each state nationwide would be virtually impossible. The only equitable way to do this would be to replace the current sales tax system with a Federal sales tax that would be imposed on everyone–online and brick & mortar stores alike–so no matter where you shop, you pay the same sales tax.
My business does not use affiliates. I do understand why the individual states would like to consider each affiliate marketing site a physical presence; whether they can make their point is another thing entirely. But really, an affiliate button is, in essence, a paid ad with a link to the retailer…the affiliate marketer’s button doesn’t actually sell anything, they just attract the customer’s attention and show them the doorway.
The unlevel playing field established during the Clinton administration (ancient history!) to benefit nascent e-tailers like Amazon needs to be righted. The argument I see running through this thread boils down to: conservatives want to keep the status quo (“rewarding” people for dodging their responsibility to pay taxes to local and state governments, although it’s couched in a “green” statement that it’s really a reward for not driving a car to the mall), while liberals see paying taxes on purchases as a commonly held responsibility toward the towns and states where we all live. When a relatively healthy and well-governed city like Denver has a $120 million budget shortfall, it’s partly because too many people are shopping online (the other day I bought a new bicycle from a locally-owned brick-and-mortar bike shop, and I was happy to see more than $60 added for taxes–my city and state need my money). This change can’t happen soon enough.
There is existing law on the books now to collect tax. It’s called Use Tax. States should enforce existing law before writing new bad law. As written now, that tax is voluntary, not mandatory as it should be, and is placed correctly as a burden on the consumer, not the retailer.
My solution is simple. Have the merchant accounts (Visa, MC, PayPal) collect the Use Tax and remit directly to the State DOR. (States pay related transaction fees.) More details in my blog.
This system would not only work for online sales, but also for those who travel out-of-State and make retail purchases from a brick & mortar (B&M) store.
The argument that forcing online retail to charge sales tax to ‘level the playing field’ with B&M stores is hogwash. It is legislators hoping to make a windfall in tax revenue who are the loudest in this idea of thought. You be the judge of who has a better advantage:
~ A B&M does not have the same tax load on a community (police/fire/sanitation service, etc.) that an online seller has.
~ You can’t touch or feel a product online. Answers to questions via email can take days. Not so in a B&M.
~ What rule or law prevents a B&M from selling online?
~ For in-state sales, both the B&M and online sellers collect and remit Sales Tax.
~ A B&M does not charge separate shipping charges, for that Lazy-Boy chair, that could be $100 or more for shipping.
~ Shopping online is greener. No travel, no gas consumed, no waiting in line. Shouldn’t that deserve a tax advantage for helping to save the planet?
Senate Bill S 43 is soon to be put up for vote. It will permanently prohibit taxing Internet access. This will not affect how Sales Tax is collected now, nor how future legislation will affect how out-of-state sales are treated.
Proposed SSUT (Streamlined Sales Tax) is bad law. If enacted, it will require all online retail to collect and remit Sales Tax for over 8000 tax districts which are not defined by zip code. Even with using a software company (i.e. alavira.com) the bookwork and fees will put many small businesses out of business. Lawmakers are clueless as to how eTail works (ask me how I know this) and are trying to make the issue a lot more complicated than it should be.
Just to be clear; I am completely against any law to collect Sales Tax for out-of-State sales. Any attempt of passing a National Sales Tax destroys States Rights. We have so few rights left … let’s not throw away this one too.
“States that have signed up for the project are unable to require retailers to pay the taxes, however, until Congress passes federal legislation clarifying it is not a burden on interstate commerce.”
END OF DISCUSSION. Why continue to waste time by acting like states can – or even should – do something which they (clearly) cannot? And for the nth time: internet sales are functionally no different than mail order sales, which have been around for 100+ years.
This article is a bit unclear, and based upon the comments, this seems to be causing some confusion among readers.
There are TWO initiatives underway right now regarding taxation of Internet sales. At the moment, the more visible of these two initiatives is the so-called “Amazon Tax.” This effort is aptly described as the “Complex Nexus” initiative – it involves unilateral state-by-state legislation designed to redefine the concept of substantial nexus (i.e. “place of business”) to single-out Internet-based affiliate network businesses.
The second of these two initiatives is commonly referred to as the “Streamlined Sales Tax” initiative – which involves a multilateral forty-four state coalition which has been working together for over ten years to modernize and simplify sales tax codes to ensure consistent collection by all businesses.
As the media and legislative spotlights have turned toward these debates, they have been categorically referring to them under a single topical headline of “Internet Sales Tax”. While the dramatic posturing of opposing viewpoints in the debates over these initiatives are as familiar and timeless as taxation itself, we have also seen these debates evolve into unintentionally combining or confusing these two initiatives as one single effort. This is unfortunate as the two initiatives have dramatically different implications, legal precedents, and costs to consumers and internet merchants large and small.
For more information, please visit: fed-tax.net
Lots of good arguments here. However, I have one base position from which I will never waver. I will never vote to tax myself and I will never vote to tax my fellow man. Taxes are a means of seizing the wealth of another without providing any measurable return. Those who tax do not seem to be held to the same standards as those taxed. They don’t have to measure up, they don’t have to produce, and for the most part they are not held accountable. In no voluntary relationship do these low standards exist and I refuse to give any authority to these carrion eaters. With regard to internet taxation, I say no and challenge all to fight taxation with every fiber of their being – you are not alone!
California is proposing a new death tax on you when you die! They are proposing that before the body is released to be buried, cremated, etc. by the family, you must first pay a death tax imposed through the coroner’s office, or possibly the service provider (mortuary, EZ Bake Oven, etc.).
So, if the states will tax you for dying, why is everyone here so surprised about them trying to tax you for internet purchases?
So, stop complaining before someone decides they will impose a tax on you for the right to exercise your freedom of speech.
Taxes on purchases should be applied fairly to all channels. Local merchants should not be burdened or have to compete against competitors that don’t have to pay the same sales taxes.
How’s this for fair? No Sales Taxes on any retail purchases for the next five years. Let the states (and the Federal Government for that matter) learn how to operate within a much smaller budget. Enough government, already.