May 02, 2013
Eliminating the Online Shopping Discount: Getting Ready for the Internet Sales Tax
Posted by Christine Hurt

I hate to admit this, but my highly time-leveraged life seems to only work because of Amazon Prime.  If someone needs a book, a math compass, a birthday present, even diapers, it has sometimes made sense for me to merely order the merchandise from Amazon, get free shipping and no tax.  Yes, sometimes that's easier than driving the 20 minutes to Target.  If I'm willing to pay $3.99, then I get it the next day.  For a $20 item, it's seems like a wash.  This may change.

On Monday, the Senate will vote (and probably pass) The Marketplace Fairness Act of 2013.  (It has its own website, here.)  This bill would require online retailers to collect and remit sales taxes based on the delivery location of goods purchased.  If there is no delivery location, for example in the case of a download, then the tax will be based on the billing address.  For those of us living in Illinois, this difference between ordering on Amazon now and in the future could be almost 10%.  (Chicago's general merchandise tax is a total of 9.25%, down from 9.5% last year.)  For those of you who live in the five states without a sales tax, keep on living in tax-free bliss.

The winners here are the bricks-and-mortar stores who have to charge tax.  Apparently, "showrooming" is a thing -- customers shop in stores where they can see and try on merchandise, then order online and skip the tax.  Ouch.  This Act should take that incentive away.  Even big stores like Gap and Best Buy charge tax online because they have a physical presence in most/all states.  Of course, online retailers have had a good run, and that run may have been enough to kill many many competitors, including big ones like Borders.  

Interestingly, Amazon, which has been the obvious beneficiary of tax-free online retailing, is supportive of the legislation.  After years of fighting states that have tried to force Amazon to pay sales tax, (blog post here), the online giant is a cheerleader for the Act.  Perhaps this is because Amazon has recently entered into voluntary arrangements with nine states, including large markets such as California, New York and Texas.  Building warehouses in these states where it is already taxed has allowed Amazon to ship merchandise cheaper and even faster.  And, Amazon may have established such a loyal fanbase of customers addicted to its convenience and fast shipping that it doesn’t fear losing customers over price.  

What about downloads, you ask?  Most states don't include digital downloads in definitions of taxable goods.  In the states that do, you are probably already paying tax on downloads from Apple (which has physical stores), but not Amazon.  Now, you will.  And, the Marketplace Fairness Act may enbolden states to redefine general merchandise tax rates or use tax rates to include digital downloads.

So, who is against Internet sales tax equity?  Online-only retailers that aren’t nearly as big as Amazon and the portal that serves them:  eBay.  Though the act exempts small businesses with no more than $1 million in revenue, that threshold leaves medium businesses with a price disadvantage and new compliance costs.  Therefore, some groups argue that the $1 million threshold could be raised to $10 million without states losing much revenue, while giving needed relief to small-to-medium enterprises. And, of course, the Heritage Foundation and anti-tax watchdogs oppose the Act as just another tax increase that will hurt consumers. 

Is it a new tax?  Not really.  It's the same old state sales tax, just with more enforcement.  Though sales taxes are an obligation imposed on the consumer, retailers are supposed to collect and remit the tax. However, retailers with no physical presence in a state can’t be compelled to collect these taxes.  Funnily enough, we were all supposed to be sending in the tax we aren't charged on our Amazon purchases.  Who knew?  Well, I hope I get some sort of Internet shopping amnesty.

 

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