7 ms·

What is Internet sales tax, and will it cripple e-commerce?

27 points by rbii 15y ago

joelhaus 15y ago
I'm familiar with the inter-state sales tax compliance functions at a number of firms and it is a tremendous burden. Not only most states, but numerous municipalities impose sales tax as well. As the article mentions, the problem is that Use tax[1] obligations are generally not paid by destination-state customers. This actually makes a great argument for why the federal government should collect a national sales tax, that is then distributed back to the states. Regarding the legality of states attempts to collect sales tax on inter-state transactions, we can look to the commerce clause[2]. In the courts, one test that has been used is to ask whether a tax creates an unfair advantage for in-state commerce over inter-state commerce[3]. If you take into account the compliance demands created by an inter-state sales tax, I think the answer is almost always YES. [1] http://en.wikipedia.org/wiki/Sales_and_use_tax http://en.wikipedia.org/wiki/Sales_and_use_tax [2] http://en.wikipedia.org/wiki/Commerce_Clause http://en.wikipedia.org/wiki/Commerce_Clause [3] http://law2.umkc.edu/faculty/projects/ftrials/conlaw/interstatetax.htm http://law2.umkc.edu/faculty/projects/ftrials/conlaw/interst...
camz 15y ago
As a CPA with years of experience in specialized state and local tax issues. I can tell you that sales and use tax is very complex and burdensome. But, at the same time internet retailers have taken advantage of the the law's inability to keep up with new business models, so internet retailers have had an unfair advantage over brick and mortar companies. Just giving the issue perspective from both sides.
- Semiapies 15y ago
  What's the "unfair advantage"? If I run a physical store in my town and someone from out of state drives in and buys something, I'm not expected to make sure the appropriate sales tax on that item gets to that person's state or municipal government. I'm only responsible for whatever sales taxes (if any) exist where I physically am. On the other hand, online merchants with physical stores already have to charge for sales taxes if their online customers are within those jurisdictions. Requiring online merchants to collect the correct sales taxes for every state and town is either a stupid attempt to increase revenue or a straight attempt to hobble online sales on behalf of physical retailers.
- fleitz 15y ago
  If it's such a great advantage why aren't B&M shops closing down and replacing their stores with a shopify account? Also, most internet sales are interstate commerce which the states have no business regulating. I can't believe the gall of the government to claim that using Amazon.com is not interstate commerce yet growing a plant in your basement for your own personal consumption is. The SCOTUS is very clear that anything with the the potential to affect the interstate market for goods and services is interstate commerce. Why can't the states respect that?
dminor 15y ago
I'll support this just as soon as B&M retailers are required to find out where their customers live and collect sales taxes accordingly as well.
- mattmanser 15y ago
  Out of interest, what's a B&M retailer?
  - nostrademons 15y ago
    B&M = Brick & Mortar, a reference to their physical stores.
    - mattmanser 15y ago
      Oh, that's a pretty silly comment then, it's where their store is. Given that people have to supply a card and/or delivery address when buying it's not going to be a massive pain for online retailers.
      - Semiapies 15y ago
        And web retailers are willing to handle sales taxes where their stores are. The difference is that they're being expected to handle sales taxes for cities and states they don't actually have any presence in - ie, in every state and municipality that has a sales tax.
        Turing_Machine 15y ago
        Indeed. I live in one city and do most of my work in a neighboring city. They both have sales taxes, but the rates are different, and (more important for this discussion) the exceptions (which rate applies to a specific item) are subtly different. I've been here ten years and I still have to think about it -- when I care. Usually I don't bother to worry about it; it's not a significant difference on most individual purchases. A retailer wouldn't have that luxury. And how in the world is a retailer supposed to determine if I'm buying the item in City A and using it in City B, or vice-versa? That happens a lot - the shipping address I give has more to do with where I'm likely to be at delivery time than where the item will actually be used. Will City A start demanding its cut of items delivered in City B? Will I have to pay taxes to both cities? What happens if I rent a mail drop in neighboring Village C that doesn't even have a local sales tax? What happens when a state with major online retailers (say, "Washingham") starts levying a punitive counter-tax on items purchased from a state (say, "Sickinois") that's insistent on collecting mail-order sales tax? That'll do wonders for the Sickinois economy, won't it?
porterhaney 15y ago
These laws certainly will not help e-commerce shops, sales will decrease (or more likely continue to increase across the industry but not at such a rapid rate) because the e-comms will now be on a level playing field with brick and mortars. All of this being said, the biggest problem will be simplicity. If there is not a service to easily distill all of these rules and plug into the bulk of shopping experiences (magento, atg, ep, shopify, etc) this will very much hurt small, up&coming e-comms. I'd imagine there is very good opportunity for a company to create an API of all of this tax information and monetize it.
- nitrogen 15y ago
  I'd imagine there is very good opportunity for a company to create an API of all of this tax information and monetize it. I hope that doesn't happen. If the government is imposing this burden, there should be a free database available for everyone to allow compliance.
subaruWRX55 15y ago
I have two points: 1. So the problem of calculating and distributing use tax is complex... That sounds like a business opportunity for a new kind of web service. 2. I think the issue just comes down to online retailers dragging their feet because they want to enjoy their advantage as long as possible.
- wtvanhest 15y ago
  1. You are 100 percent correct, the fact that this is supposedly a pain point will lead a lot of people to be the best at solving this and will drive the cost of collection to near zero. (Walmart.com already does it) 2. Of course, Amazon.com got CA to agree waiting before taxing bc they knew once people tried prime, they would be hooked and would pay the tax later since there will be no alternative.
- stevedewald 15y ago
  "2. I think the issue just comes down to online retailers dragging their feet because they want to enjoy their advantage as long as possible." I wish it were that simple. This bill would have effectively shut down my small business (we're an online retailer). The overhead of paying taxes across many different states and municipalities is, frankly, impossible for smaller teams / startups to deal with. Even if we could outsource this, it would effectively reduce our margins to the point where we couldn't compete with brick & mortar. We already collect taxes and pay them to the states we operate in. This bill wouldn't cause us to pay more tax (we're based in California, so we'd probably pay less taxes as a result), but instead seems like it's more a result of anti-competitive lobbying efforts from B&M retailers.
bxc 15y ago
Now I don't really know how well it works in practice but the european model for VAT (the rough equivalent of sales tax) is basically this: if you're a small business, you don't have to collect VAT for the place you're sending the goods; but if you don't, you have to collect it for your own location (rather than collecting nothing). And over a certain business size, you do have to collect it for the destination. The EU has fairly uniform VAT rates (around 20%), so then there isn't a huge difference to where you charge the tax, and so end consumer prices don't vary by a huge amount. Maybe the much more variable rates in the US plus what seems to be more easier ability to move jurisdictions would lead to sales tax jurisdiction shopping a more than in europe.
jellicle 15y ago
The pretty obvious solution, which I expect the government will eventually luck into, would be for the Federal government to collect a, say, 5% sales tax on all inter-state commerce. Remit 2% to state A, 2% to state B, keep 1% for itself, and everyone is happy. Easy to administer, easy to collect. Lucrative!

27 points by rbii 15y ago

I'm familiar with the inter-state sales tax compliance functions at a number of firms and it is a tremendous burden. Not only most states, but numerous municipalities impose sales tax as well. As the article mentions, the problem is that Use tax[1] obligations are generally not paid by destination-state customers. This actually makes a great argument for why the federal government should collect a national sales tax, that is then distributed back to the states. Regarding the legality of states attempts to collect sales tax on inter-state transactions, we can look to the commerce clause[2]. In the courts, one test that has been used is to ask whether a tax creates an unfair advantage for in-state commerce over inter-state commerce[3]. If you take into account the compliance demands created by an inter-state sales tax, I think the answer is almost always YES. [1] http://en.wikipedia.org/wiki/Sales_and_use_tax http://en.wikipedia.org/wiki/Sales_and_use_tax [2] http://en.wikipedia.org/wiki/Commerce_Clause http://en.wikipedia.org/wiki/Commerce_Clause [3] http://law2.umkc.edu/faculty/projects/ftrials/conlaw/interstatetax.htm http://law2.umkc.edu/faculty/projects/ftrials/conlaw/interst...

camz 15y ago

As a CPA with years of experience in specialized state and local tax issues. I can tell you that sales and use tax is very complex and burdensome. But, at the same time internet retailers have taken advantage of the the law's inability to keep up with new business models, so internet retailers have had an unfair advantage over brick and mortar companies. Just giving the issue perspective from both sides.

Semiapies 15y ago
What's the "unfair advantage"? If I run a physical store in my town and someone from out of state drives in and buys something, I'm not expected to make sure the appropriate sales tax on that item gets to that person's state or municipal government. I'm only responsible for whatever sales taxes (if any) exist where I physically am. On the other hand, online merchants with physical stores already have to charge for sales taxes if their online customers are within those jurisdictions. Requiring online merchants to collect the correct sales taxes for every state and town is either a stupid attempt to increase revenue or a straight attempt to hobble online sales on behalf of physical retailers.
fleitz 15y ago
If it's such a great advantage why aren't B&M shops closing down and replacing their stores with a shopify account? Also, most internet sales are interstate commerce which the states have no business regulating. I can't believe the gall of the government to claim that using Amazon.com is not interstate commerce yet growing a plant in your basement for your own personal consumption is. The SCOTUS is very clear that anything with the the potential to affect the interstate market for goods and services is interstate commerce. Why can't the states respect that?

dminor 15y ago

I'll support this just as soon as B&M retailers are required to find out where their customers live and collect sales taxes accordingly as well.

mattmanser 15y ago
Out of interest, what's a B&M retailer?
- nostrademons 15y ago
  B&M = Brick & Mortar, a reference to their physical stores.
  - mattmanser 15y ago
    Oh, that's a pretty silly comment then, it's where their store is. Given that people have to supply a card and/or delivery address when buying it's not going to be a massive pain for online retailers.
    - Semiapies 15y ago
      And web retailers are willing to handle sales taxes where their stores are. The difference is that they're being expected to handle sales taxes for cities and states they don't actually have any presence in - ie, in every state and municipality that has a sales tax.
      - Turing_Machine 15y ago
        Indeed. I live in one city and do most of my work in a neighboring city. They both have sales taxes, but the rates are different, and (more important for this discussion) the exceptions (which rate applies to a specific item) are subtly different. I've been here ten years and I still have to think about it -- when I care. Usually I don't bother to worry about it; it's not a significant difference on most individual purchases. A retailer wouldn't have that luxury. And how in the world is a retailer supposed to determine if I'm buying the item in City A and using it in City B, or vice-versa? That happens a lot - the shipping address I give has more to do with where I'm likely to be at delivery time than where the item will actually be used. Will City A start demanding its cut of items delivered in City B? Will I have to pay taxes to both cities? What happens if I rent a mail drop in neighboring Village C that doesn't even have a local sales tax? What happens when a state with major online retailers (say, "Washingham") starts levying a punitive counter-tax on items purchased from a state (say, "Sickinois") that's insistent on collecting mail-order sales tax? That'll do wonders for the Sickinois economy, won't it?

porterhaney 15y ago

These laws certainly will not help e-commerce shops, sales will decrease (or more likely continue to increase across the industry but not at such a rapid rate) because the e-comms will now be on a level playing field with brick and mortars. All of this being said, the biggest problem will be simplicity. If there is not a service to easily distill all of these rules and plug into the bulk of shopping experiences (magento, atg, ep, shopify, etc) this will very much hurt small, up&coming e-comms. I'd imagine there is very good opportunity for a company to create an API of all of this tax information and monetize it.

nitrogen 15y ago
I'd imagine there is very good opportunity for a company to create an API of all of this tax information and monetize it. I hope that doesn't happen. If the government is imposing this burden, there should be a free database available for everyone to allow compliance.

subaruWRX55 15y ago

I have two points: 1. So the problem of calculating and distributing use tax is complex... That sounds like a business opportunity for a new kind of web service. 2. I think the issue just comes down to online retailers dragging their feet because they want to enjoy their advantage as long as possible.

wtvanhest 15y ago
1. You are 100 percent correct, the fact that this is supposedly a pain point will lead a lot of people to be the best at solving this and will drive the cost of collection to near zero. (Walmart.com already does it) 2. Of course, Amazon.com got CA to agree waiting before taxing bc they knew once people tried prime, they would be hooked and would pay the tax later since there will be no alternative.
stevedewald 15y ago
"2. I think the issue just comes down to online retailers dragging their feet because they want to enjoy their advantage as long as possible." I wish it were that simple. This bill would have effectively shut down my small business (we're an online retailer). The overhead of paying taxes across many different states and municipalities is, frankly, impossible for smaller teams / startups to deal with. Even if we could outsource this, it would effectively reduce our margins to the point where we couldn't compete with brick & mortar. We already collect taxes and pay them to the states we operate in. This bill wouldn't cause us to pay more tax (we're based in California, so we'd probably pay less taxes as a result), but instead seems like it's more a result of anti-competitive lobbying efforts from B&M retailers.

bxc 15y ago

Now I don't really know how well it works in practice but the european model for VAT (the rough equivalent of sales tax) is basically this: if you're a small business, you don't have to collect VAT for the place you're sending the goods; but if you don't, you have to collect it for your own location (rather than collecting nothing). And over a certain business size, you do have to collect it for the destination. The EU has fairly uniform VAT rates (around 20%), so then there isn't a huge difference to where you charge the tax, and so end consumer prices don't vary by a huge amount. Maybe the much more variable rates in the US plus what seems to be more easier ability to move jurisdictions would lead to sales tax jurisdiction shopping a more than in europe.

jellicle 15y ago

The pretty obvious solution, which I expect the government will eventually luck into, would be for the Federal government to collect a, say, 5% sales tax on all inter-state commerce. Remit 2% to state A, 2% to state B, keep 1% for itself, and everyone is happy. Easy to administer, easy to collect. Lucrative!