How Do Small E-Tailers Deal With Internet Sales Tax? ( Part 2)

By James Maguire | Posted January 14, 2004

Jon Abolins is a man who thinks about Internet sales tax far more than might be considered healthy. As vice president of Tax and Government Affairs for Velosant, a tax software company, he studies every nook and cranny of the arcane Net sales tax debate.

Velosant's software, Taxware, is a leader in helping collect and report Net sales tax. The company is set to become a certified government service provider if legislation allows states to impose Net sales taxes on remote sellers such as e-commerce sites and catalog merchants.

Abolins discussed two key facts about the Net sales tax debate. First, state and local governments are desperate for the bill to pass. Currently, there are two pieces of legislation pending that would allow states to collect sales taxes from remote sellers (both the House and the Senate are working on bills). While they face an uphill battle — passing a tax bill in an election year is tough, Abolins notes — the bills have bipartisan support. The budget crisis facing many state and local governments means there is "very strong impetus" to pass the bill, he says.

The second point Abolins discussed was that major forces are working to simplify Net sales taxes. Historically, one of the difficulties with imposing sales tax on remote sellers is the labyrinthine tangle of regulations these sellers would shoulder if they faced tax codes from 50 different states. For example, in one state juice is not taxed; in another state, juice is taxed if sugar is added, and so on, ad infinitum. To simplify the morass, a group of legislators and regulators from state governments has been working to standardize regulations. Called the Streamlined Sales Tax Project, the group has made a lot of progress, Abolins notes.

"That group sets the standards and then each state implements those standards within its own legislature," Abolins says. "The success of that group will dramatically reduce the complexity."

One of the provisions in both bills is that regulations have to be simplified before the federal government lifts the prohibition against collecting sales tax on remote sellers.

As of late December 2003, not enough states had done the necessary simplification to meet the requirements of the federal bills, Abolins said. However, "They are much closer than you would think — it could be the first or second quarter of next year before that threshold is met."

Congressional Debate
Advocates on both sides of the Internet tax debate have testified before Congress. Not surprisingly, brick-and-mortar retailers favor the legislation while remote sellers, including direct marketers and e-commerce retailers, oppose it.

But compromise seems likely, Abolins says. "Both sides say that with the right level of simplification in state and local sales tax laws, they'd be willing to comply with those rules," he says. "The argument is always around how much simplification is necessary."

Even if federal legislation passes, it's likely that not all states will be allowed to impose sales taxes on remote sellers, at least initially.

The federal legislation is not going to lift the prohibition against collecting sales taxes for those states that do not simplify their laws. "That cherry on the sundae, so to speak, is only available for those states that achieve the simplification," Abolins says.

Various states have lesser or greater amounts of work to do to meet simplification guidelines. "Wyoming was able to achieve those simplifications within a few weeks of the standards being set. But other states like California and New York are just getting started," he says.

What this means is that if the legislation passes, Net sales taxes could become a logistical headache for e-tailers, with a patchwork of states allowed to collect tax and another group of states still not able to.

No matter how the states' simplification efforts play out, the legislation — as currently drafted — requires only those remote sellers with $5 million in yearly remote sales to charge sales tax.

It appears that the legislation would affect only a limited number of e-tailers. Large multi-channel retailers that have stores in most states, like Wal-Mart or Sears, already charge sales tax on many of their online transactions; the new law would have limited effect on them. And mom-and-pop shops don't have enough revenue to worry about sales taxes.

The government, Abolins says, "doesn't want to crush small businesses doing business on the Internet, but they want to make sure that companies like Amazon and LL Bean, the traditional remote sellers, are compliant with the same rules as other retailers."

Many governments around the globe are watching the progress of the Streamline Sales Tax Project, Abolins says, and are considering adopting similar simplification efforts.

"It's likely that two or three years after the tax becomes a reality here in the U.S., which is scheduled for late next year or probably early in 2005, other governments could follow suit," he says.

Continuing Advantage
The lack of sales tax on most transactions "still represents an advantage for online commerce today," says Gartner analyst Stephen Smith.

He notes that consumers' perception of the price is driven by the total amount they pay, and the six to eight percent sales tax that e-tailers don't have to charge gives them an edge against offline retailers. "Consumers are not breaking it down by saying 'this part is shipping, and this part is [sales tax],' It's all bundled in one," he says.

Because e-tailers want this advantage the sales tax debate will continue to generate controversy. "Anyone doing a substantial amount of business on the Internet doesn't really want there to be sales tax," he notes, adding that consumers agree with this sentiment.

But Smith sees the lack of online sales tax as an unfair advantage for e-tailers. "From a business perspective, I don't know why we would provide a tax incentive by channel."

Smith observes that during the e-commerce start up years, "we didn't know what this thing was going to be and how big it was going to get — providing an advantage seemed to make some sense."

But now that online is a pervasive sales channel — granted, still only comprising two percent of retail sales — it no longer deserves this advantage, he says. "I don't think it's the kind of baby that needs to be nurtured in the way of economic incentives."

The Impact on E-commerce Growth
Regardless of the heated debate, industry experts seem to agree on one thing: online retailing has matured to the point that added sales tax will not likely stunt e-commerce's growth.

"The absence of sales tax for many pure plays served as an economic stimulus of sorts as online retailing was coming up to speed," says comScore vice president Daniel Hess. "But now, more people than ever are shopping online and are more comfortable with it. For the vast majority of online consumers, I suspect [sales tax] will not matter."

Factors other than sales tax are much more important to consumers, notes Nielsen/Netratings analyst Abha Bhagat. She pointed to large multi-channel retailers like Sears and the Gap that already charge sales tax for many online transactions because they have stores in dozens of states. Sales tax doesn't appear to have impacted the e-commerce outlets of these large retailers, she says.

"Most people, when they're shopping online, are not saying, 'Oh, they charge sales tax so we won't buy online,'" Bhagat says. "They're looking at the convenience factor, at the ability to compare prices and compare features. Those come into play more than sales tax."

In fact, Bhagat says, charging sales tax actually helps the large retailers who sell online: it makes it easier for people to return purchases at their local store. "So it essentially enables a closer integration of online and offline properties. If somebody buys online they can return it in the store as opposed to having to ship it back and incur the costs."

If legislation does pass, e-tailers of all sizes are at least partially equipped to handle the new chore, Hess notes. Hess conducted research that examined the transaction data of about 600 online retailers between early 2002 and early 2003. "About two thirds already have some mechanism in place to process sales taxes," he says. (Concerning the one third of e-tailers who are not set up to collect taxes — though virtually all sites have some in-state customers — Hess couldn't speculate.)

In short, Hess says, "I don't believe sale tax will offset the attraction of online shopping enough to put a real dent in the growth rate we've been seeing."

 

Adapted from ECommerce-Guide.com, part of internet.com's Small Business Channel.


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