Wednesday, July 01, 2009

Blast From the Past: Let's Talk Sales Tax on the Internet.

Sorry to rehash an old blog post, but I thought it was relevant in light of the recent news coming from Amazon and Overstock. The wave of States going after online retailers for Sales Tax collection is becoming a Tsunami. This post was originally written in January of 2009.

Brick & Mortar stores have been complaining for years about the competitive advantage online stores and catalog companies have regarding sales tax. To be completely honest, I make most of my online purchases at Amazon because I don't like paying sales tax. I like the current system just the way it is, but it will change and sooner rather than later. [I now make all of my online purchases at Buy.com and pay sales tax because Buy.com is based in California.]


Unfortunately the tide has turned and will soon be gathering steam as State after State follows the model New York started:

"New York state won a round in court against Amazon.com over a new law requiring out-of-state online companies to collect sales tax from shoppers in New York.


The law applies to companies that don't have offices in New York, but have at least one person in the state who works as an online agent -- someone who links to a Web site and receives commissions for related sales."

Of course this is just round one of the court battle and my guess is that Amazon will continue this fight up the Judicial ladder until it is presented to the US Supreme Court, but it is just a matter of time before sales tax is charged on every purchase from Brick and Mortar to online stores.


I'm resigned to the fact that it will happen in the near future, but I'm very concerned with the implementation. Small business cannot manage collecting a different sales tax for every city they ship to, it would cause an undue burden on all but the largest of companies.


In my years selling online with Glacier Bay, we shipped to every single state in the US and managing the different sales tax requirements for each local jurisdiction would have made my low margin business implode. Just look at the different tax rates for each state.


I think there is a simple solution, but as yet I haven't heard any lawmakers presenting it, though I'm sure I'm not the only one to come up with it.


The Internet should be treated as its own locality with a flat sales tax rate of 4 - 5%. All sales on the Internet need to have the same sales tax rate irregardless of where the customer is located. Payments need to be made to a national clearinghouse for distribution to the states.


This of course will only be the first stage of the process because once governments start seeing the cash they will of course want more. In the first iteration though, local governments will not take part in the revenue unless they work out a deal specifically with their state's tax department.


Let me be clear, I do not want this to happen, but it is inevitable that sales tax collection will come to the Internet and online retailers need to band together now to enact something close to what I've presented (and I'm sure others have as well) while they still have some negotiating leverage.


The key is not to solve the tax problem all in one fell swoop, but to come up with a workable solution that gets state government tax revenue and does not put an undo burden on retailers to collect that tax.


Just my 15%

43 comments:

ms.pat said...

If everybody paid the sales tax in their state then this wouldn't be necessary. I pay mine every single year - who wants those people on your back. Don't know about other states but in California we have to also pay all the weedly little percentages various cities dump on us - its a pain breaking it all down - I can't even fathom doing that for the entire country! We're in a recession and yes...the states are gonna hurt just like we will hurt. In their maddness to keep the status quo no matter who they have to wring the money from I feel this would go overboard and scare sellers into not selling or not reporting sales! In a recession everybody has to make do with less - states and government included!

Oren said...

Randy,

You don't have half of the problem.

Like ms.pat said in CA (and in KS) seller have (in theory) to calculate each and every tax district sales tax. (since each county and city can, and often do, add their own added sales tax).
AND the seller also have to submit a list with all the sales and which tax district they belong to.

To the best of my knowledge most stats actually have many tax districts and I once heard from tax adviser that there are over 9000 sales tax districts in the US!!!

VT have an interesting way to deal with that:
Each citizen based on his annual income have to pay extra "internet tax". The assumption is that everybody buys on the internet and the more you make the more you bought there.

I think that VT solution IS the right and fair one. Since it is taxing the right people and NOT making us sellers the states unpaid tax collectors. It also allow each state citizen to decide how much tax they want to pay. (no taxation without representation or something)

Randy Smythe said...

Oren, with my plan Pat and you would just have to collect a 4-5% Internet Sales Tax and send that with a tax return to a national clearinghouse for distribution to the various states.

If you solely sell on the Internet you would no longer have to do what you currently do.

The concept is get some money for the governments and make it easy for sellers to comply.

Version 2 can be more complicated

Cliff Aliperti said...

Hey Randy,

I was thinking flat tax about a paragraph before I got to your suggestion, but by the time I reached the end of your post I had another thought. While the flat tax idea is sound on it's own, what about the costs of implementation?

We're still going to have to do just about as much work to file so that any clearinghouse knows how the monies should be distributed, so why add another layer of bureaucracy to government? When this was first talked about years back weren't there a number of programs created to streamline the filing process? I would think for third party sites such as eBay and Amazon all that need be done is add additional function to the shipping module where zip codes are stored? (I don't know, but that's what I would think).

I'm open to anything, because if this does come down it's going to be a royal mess pretty much no matter what...and you know whose lap the bulk of that mess will fall to right?

Thanks,Cliff

ms.pat said...

I'm pretty sure something tax wise will be laid on us. As more and more people lose jobs the states and the government will lose tax money - out of work people don't pay tax. They have to get it from somewhere...which they will do rather than cut the fat in their own budgets. I can't see Paypal or Ebay doing the work for us. Paypal does collect the california sales tax for me but then I have to break it down into the different districts. I imagine it would have to be some sort of a flat tax...or maybe just have us break sales down by state and each state have a flat internet tax on its share of sales. Whatever...we all know its gonna be a mess :-(

Anonymous said...

You can be sure Ebay will encourage sellers to pay the tax for the buyer, just like free shipping.

a_luddite said...

i dont think anyone has yet mentioned that there is a unified sales tax plan for the internet that many states have approved that's still being worked out. i cant recall if it was this year or last year's amazon conference had a rep from the state of washington presenting the status of the online sales tax situation.

a_luddite said...

oh and dont forget i think in 2010 or 2011 paypal starts sending out 1099's!

Rich said...

They will steal every last penny from the American taxpayer and it will go into the pockets of the rich. Get a good tent since you may have to live in it soon.

Christy Pinheiro, EA said...

Randy's idea is a good one- I like the thought of a flat tax for internet purchases. The United States has the dubious honor of having the most complex tax laws in the world. The problem with a flat tax on internet purchases is the prospect that foreign sellers of goods would then have an unfair advantage over domestic businesses. EBay is already cluttered with Chinese and Hong Kong businesses selling cheap goods. You can't stop the tide of technology, and government has always been slow to respond.

Stefan said...

Hey Randy -

Out of curiosity, is your problem with tax on Internet sales the fact that it shouldn't be done, or that it would be too hard to implement? I can't tell.

The way I see it, online retailers and buyers have been getting away with murder for the past 10 years...and we know it, too.

The fact is there is no good reason the Internet should not be taxed. Yeah, it sucks, but it's hard to argue why Internet sales shouldn't be taxed. States are losing ridiculous amounts of money that they should be and would have been earning 10 years ago.

Like it or not it's coming, and we should be happy if it is only 4-5% as you suggest Randy, as opposed to the VAT or the GST in Australia, which is a flat 10% tax on all Internet sales.

The only real problem I see is how to deal with those states that don't have a sales tax, like NH or Oregon. Why should someone who lives there have to pay tax on any sale, brick and mortar or Internet. I mean a lack of a sales tax is half the reason people live in New Hampshire.

Randy Smythe said...

Stefan, I don't like sales tax at all, but that is a different discussion.

Sales tax on the net will happen. 1st iteration needs to be simple and reasonable (4% to 5%)

The KISS principle doesn't seem to work in government.

As for those states that don't charge sales tax they should charge Internet sales tax. That simple.

Anonymous said...

It doesn't matter. If this goes thru, the online economy is going to shift over to BonanzleBucks!

BMX said...

Nice story. Did you find my paper helpful?

ms.pat said...

There's one more thing to be considered about sales tax on internet purchases. I found just last night I was ordering an item from Amazon and checked the prices between Amazon and the other sellers listed. I found I was looking for a company that had low or free shipping and that was NOT from CA so I wouldn't have to pay sales tax. I guess as a shopper we look for things like this. If everyone charged sales tax I think I would find myself going to a brick and mortar store where I can instantly see the item and bring it home with me. I'm sure the internet retailers would lose sales.

GazLanNaThai said...

Hi Randy

One of the biggest problems I see with this is for non-US sellers.

If I'm based in another country and I sell something to a US Citizen, why should I have to pay US State tax on that sale - it didn't originate in the US.

You can bet that if something like this comes to pass, then overseas sellers registered on US venues such as eBay will be getting dinged for the tax at point of sale - e.g. lose 12% in FVFs PLUS 5% in Sales Tax.

Government will structure the ruling so that massively multi-user venues like eBay have to collect the tax.

Gaz

Randy Smythe said...

BMX,

Yes your paper was helpful.

Gaz,

Yes, government will screw it up, that is why I'm suggesting small bites first.

eBay and Amazon will fight the collection aspect of this and I agree if they collect they will ding everybody but there should be an exclusion for International sales. Or they should be handled at customs just like when US sellers ship to different countries.

The key is not trying to take too big of a bite from the Apple. Keep it simple, see what works and what doesn't and revise.

I realize that this is not the way government works.

Oren said...

Randy,

I still fail to see why us sellers have to be the tax collectors.

I still think that VT way is the way to do it.

In this way each state make the decision whether or not to tax its ppl for buyin over the internet.

Again VT levy tax on ppl based on their income.

Randy Smythe said...

Oren,

In most states sellers have to collect sales tax. It is not the ideal approach and I would prefer that "use" tax be enforced but that is a not going to happen.

The responsibility will fall on the people/companies that collect the payment.

tula said...

My biggest argument against internet sales taxes is that online stores don't use the services of the states where they have no physical presence. A B&M location uses services, like police, fire, street maintenance, etc... Why should an online retailer with no presence in a state have to pay that state for anything? It's the buyer's responsibility to pay the appropriate taxes to his or her locality, not the seller's.

Randy Smythe said...

Tula,

I agree with you, but unless there is a better method for enforcing use tax, this is an approach that could work.

The government wants the money collected when the sale is made, unfortunately since B&M retailers already collect that tax, the government is going to make that the responsibility of the online retailer.

Anonymous said...

I think Amazon should go all the way to the highest court with this one. The politicans in charge don't know how to control spending with their bloated budgets. Why should online retsilers and customers suffer. Isn't about time the public gets a break from all this taxing. New York is one of the highest taxed states to live in,not to mention Chicago who pays the highest sales tax. Let these politicians like Patterson and Bloomberg tighten their belts. Patterson is so ridiculous he wants to tax soda at 18 percent at the supermarkets. This guy is nuts.

Randy Smythe said...

Anonymous,

Unfortunately, reasonable minds just won't rule in this issue. Hopefully Amazon takes it to the Supreme Court.

My suggestion and the suggestion of others like BMX are not likely to be considered.

Anonymous said...

In my opinion, regardless if the states and /or local governments need additional revenue of any sort,i think that people and businesses of all likes should put up a very harsh fight in regards to any type of new taxation. Why? Because first of all, given the fact that we're in a global recession (yes, it's global in nature)raising, yet alone, enforcing any type of new tax is just down right incomprehensible. In other words,if folks don't have the funds yet alone aren't spending due to the financial calamity, what makes you think that by increasing cost / taxes that your budget woes would be resolved (I mean it doesn't take a rocket science to configure this stuff out, but then again, i have to keep reminding myself who we're dealing with).
Another thing to consider in which should make people and businesses united in preventing any type of new taxation is the fact that, it has been shown, that when governments don't practice logical spending / accounting practices, it grants them a license to be reckless, because at the end of the day, the burden will ultimately be put on the U.S. taxpaper.By showing resistance, it will put our elected officials in a position in which will enforce them to comply with practices that will be more ethnical and hopefully more practical for the citizens that elected them to do a job and make decisions that will be in the best interest of society.
You don't need new taxes...PLAIN AND SIMPLE!!!Enforcing new taxes just create more ways for the government to take more out of the pockets of hard working folks and / or businesses that are struggling as it is.Remember this, reckless spending from our government was one of the key fundamentals that got use into this mess. Power for the people by the people!!! Just my 2 cents.

Keith said...

Randy,

I, like you, know Internet Sales tax will be coming sooner or later. I am against any tax collection for out-of-state sales.

B&M disadvantage?
~ An Internet business does not have the same tax load on a community as a B&M. They don't need police/fire/sanitation services that a B&M does.
~ You can't touch or feel an item online, and waiting for an answer to an email question can take days. Not so in a B&M.
~ What rule prevents a B&M from selling online?
~ For in-state sales, both B&M and Internet sellers collect and remit Sales tax.

The inequality, as legislators see it, is a need for more tax revenue.
Item price has historically been lower on the Internet. Even adding sales tax, most of the time, online would still be cheaper. Let the B&M whine.

Your solution would be simple. My problem is that it would need to be Federally mandated. That destroys States Rights. We have so few rights left, lets not throw this one away too. Add to the fact that legislators don't know how to write simple law (and are clueless about online sales) it would end up being more of a complicated mess than it is now.

My solution is to have the States enforce existing law ... Use Tax. This puts the burden where it belongs, on the consumer, not the seller. It's easy to do too. Have the Merchant Accounts (Visa, MC, PayPal) collect the tax and remit directly to the States (States pay the MA fees) More details here:
http://www.thedumbdog.com/blog/?p=62
Amazon/eBay/PayPal already have the data, and software is available. Uploading cart info to the MA is simple and would allow instant tax assessment on the consumer. This system would also work for those who cross state lines and buy from a B&M (to save on taxes) the billing/shipping info on the credit card would be used to asses and collect the use tax.
A B&M or Online seller should not be concerned where a buyer lives if it is out-of state. They should also not be concerned, or care, that a little town in the boonies wants an extra 1% tax for a soccer field 'for the children' If they are so concerned at lost tax revenue, then push that state to enforce existing law, not write new law that puts small business out of business.
SST and/or an Internet tax will do exactly that.
Keith
aka xcergy

Randy Smythe said...

Keith,

If your idea could be acted upon, I would certainly be all for it. On principle i agree with you fully but as a practical matter, sales tax is coming so let's ease into it.

I agree that my idea requires a federal solution and my only thought is: "If sales tax is coming to the web" then I'm willing to have a federal solution.

I also don't beleive that local municipalities should participate in the tax. Basically 4-5% goes to each state a very simple compromise.

Only becasue it is a foregone conclusion that "the tax is coming"

I do believe your idea is the best though.

Anonymous said...

The top marginal income tax rate in the USA was 7% in 1913. Within 5 years, the top marginal rate was 77%. The top marginal rate was 94% in World War II, and remained over 90% until Kennedy offered tax relief by lowering the rate to a mere 70%.

It's all well and good to propose a 'reasonable' 4 to 5% national sales tax, but once it's in, it's in. And then every time some government pinhead needs money, they'll start bumping the rate up.

Right now, there's a lot of pinheads and they need a lot of money.

Randy Smythe said...

Anonymous,

I hate the idea too and if I thought fighting it like Amazon and Overstock are doing would ultimately win a permanent ban of online sales tax, I would be shouting my support from the mountain top.

I prefer taxes on consumption to taxes on income, but that is a completlely different discussion.

We will have a national sales tax eventually and it will be sooner rather than later.

I make most of my online purchases from 3P merchants at Buy.com and even though many of those merchants are located outside of California, I still have to pay 8.75% in Sales Tax.

The current system is not fair to anyone, really and gives some online sites a competitive advantage. In my view a 4-5% national online sales tax would be the best solution to the problem.

Keith said...

The LA Times came out today wanting to do away with Quill vs. ND (1992)
- http://tinyurl.com/kqvbeo
I wrote a response to the editor, and posted it to my blog
http://www.thedumbdog.com/blog/?p=69
Many points are what I have stated here before, but I also added:
~ 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?
Your one tax fits all sounds nice Randy, but it does not address other variables, such as ... is shipping included in the tax? For some States, it is, and others it is not.
And what about those buyers who travel out of State to buy goods from a B&M to save on sales tax. To me, it is the same as buying online. They should suffer the same penalty as we do, should such laws go in effect.

Oren said...

Keith,

In most cases you are paying state tax when you cross the border and buy at B&M - you pay the other state sales tax.

Randy Smythe said...

Keith,

The LA Times is wrong, as they often are and you are right as you often are. Unfortunately right or wrong has little to do with this.

Eventually, maybe as soon as next year, there will be a sales tax on Internet sales. If we leave this task up to each State we will have a jumbled mess, look what they are doing right now with the Affiliate wars.

If we leave it up to the Feds it will be a mess also. I hate taxes and they are never fairly enforced. As online retailers we need to get in their and negotiate an equitable plan rather than let the Government decide this.

Just my 15%

Keith said...

'In most cases you are paying state tax when you cross the border and buy at B&M - you pay the other state sales tax.'

True, but you are still obligated to pay Use Tax ... and what of those Massachusetts buyers who goto Tax Free New Hampshire? What is to be done with those 'Lawbreakers'? Blogs in Boston are full of examples like this.

I'm ready to start a .org site to fight back. I know where you stand, but are the other readers ready to join and help out?

Oren said...

A. As Randy pointed out no one (aside from the VT example I gave) is enforcing use tax laws.

B. Unlike most Americans (maybe because I'm not natural born one) I don't oppose taxes as such.

C. I think that VT option or randy option are fair and reasonble ones and I would (if I could) vote for either.

Henrietta said...

Nice idea Cliff but unfortunately zip codes do not align with taxation districts.

States like Oregon who do not have a sales tax compensate by imposing higher income taxes than states who have sales taxes.

Likewise states which do not have state income tax like Nevada and Montana have higher sales taxes.

Hawaii which is the taxingest state has a GE tax of 4% payable on everything plus a high state income tax.

Anyone or anything which attempts to reason with the individual states to work out a universal system is doomed to failure.

Keith said...

@ Henrietta
Good points.

You can't make all States happy. Even with a 5% flat tax, California will feel cheated. No Sales tax States would get a windfall. It's not fair for all parties involved.

Collecting Use Tax is fair. With my plan, States get their taxable rate, No Sales Tax States residents still get goods tax free. If a CA buyer gets his item from OR, they still pay CA use tax. IT'S THE LAW NOW. Why can't States enforce existing law? No, they have to make new law that is more complicated and is bound to put small business out of business.

Randy Smythe said...

Keith,

I'm just being pragmatic here. Use tax is the fairest tax for all involved, but we all know that getting 50 states to enforce use tax is an impossible task.

Also, as you point out, the idiots (my word)in Statehouses and in Washington will come up with some convoluted new law that will require the seller to collect taxes and may put some out of business.

The first option will not happen and the only way to stop the second option is to suggest something similar to my plan.

The burden on all involved will be managable with my plan.

Keith said...

@ idiots (lawmakers)

If you can't enforce law, then it should be done away with.

I truly dread the alternatives they plan.

Ajit Srivastava said...

Why not treat the online store as a Brick and Mortar store with a physical address and charge the sales tax based on the state in which the business is registered.

If the business is registered in NY then they buyers would pay NY sales tax.

Paul said...

Go to www.fairtax.org. It's not a flat tax, but a national sales tax. Key component is it abolishes the IRS as there would be no income tax or payroll tax among other key points. Levels the playing field for all. It might not be the greatest for us Internet sellers, but once the politicians ruin our economy permanently, it will be the only viable way to recover:

What is the FairTax?

The FairTax plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including:

* A progressive national retail sales tax.
* A prebate to ensure no American pays federal taxes on spending up to the poverty level.
* Dollar-for-dollar federal revenue neutrality.
* Repeal of the 16th Amendment through companion legislation.

There are good books on the subject, latest is: 0061540463

Keith said...
This comment has been removed by the author.
ionelutz said...

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gKass said...

irregardless isn't a word

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