All Hype, No Harm: e-Commerce Sales Tax Won’t Kill The Internet

LINK: http://www.twice.com/blog/executive-insight/all-hype-no-harm-e-commerce-sales-tax-won-t-kill-internet/58745

 

The conversation over Internet sales tax has assumed an apocalyptic tone.

Like doomsday prophets babbling on a street corner, some people continue to claim that theMarketplace Fairness Act (MFA) and its latest manifestation, H.R. 2775, the Remote Transactions Parity Act (RTPA), will crush online sellers and cause all kinds of mayhem.

This is all spin peddled by lobbyists. Despite the rumors:

*No, small businesses will not have to pay hundreds of thousands of dollars (nor tens of thousands) for tax automation software; it will be provided by the state;

*No, the RTPA won’t be any harder to administer than our current sales tax system. Actually, it should easier to manage thanks to software;

*No, small business won’t face the burden of audits, the software providers will; and

*No, the courts won’t be clogged with litigation.

Frankly, this storyline about the difficulty of administering sales taxes is an insult to online sellers. These are businesspeople who know how to create a web store, how to collect and process credit card payments, and how to manage shipping across the country. It’s demeaning to argue that that simple tax software will be too complex for them.

The RTPA will have no impact on business. Business owners will sell and ship their goods as usual, and online merchants will pay taxes, just like competitors who sell in brick-and-mortar stores or take phone orders.

For more than a decade, the U.S. sales tax system has rendered the Internet a duty-free zone, like the ones at the airport. This advantage dates back to the 1992 Supreme Court case Quill Corp. v. North Dakota, in which the court ruled that remote sellers do not have to collect and remit local sales taxes unless they have a nexus, or physical presence, in the state where the customer lives.

Back then, collecting tax across 10,000 jurisdictions was considered an “undue” burden. Today collecting sales tax across 10,000 tax jurisdictions is no more complex than collecting taxes in one jurisdiction, because technology automates the entire process. The Supreme Court itself recently acknowledged that the time for this ruling has passed, and the justices want it reversed.

E-commerce companies have already started collecting sales tax in dozens of states that have implemented the so-called “Amazon Tax” and they’re doing just fine. Amazon itself collects sales tax in 25 states, and the company just netted $23.2 billion in sales during the second quarter, a 20 percent year-over-year gain. The company even posted an unexpected $92 million in profit and saw its share price rise 17 percent on the news. It’s worth noting that product sales (as opposed to web services) were up nearly $2 billion over the prior-year period.

So what is the impact of requiring e-commerce businesses to collect sales tax? In 2014, researchers at Ohio State University were curious to see how sales tax would affect Amazon’s business. Their paper, “The Amazon Tax: Empirical Evidence from Amazon and Main Street Retailers,” found that households living in California, New Jersey, Pennsylvania, Texas and Virginia reduced their Amazon spending by 9.5 percent after those states subjected e-retailers to remitting sales taxes.

But here’s the kicker: Those same households increased spending at local brick-and-mortar retailers by 2 percent and spent 19.8 percent more with other online retailers. For higher-ticket items (over $300), they found that consumers were even more likely to shift purchases from Amazon to other merchants.

The study concluded that taxing online businesses like Amazon “will lead to an increase in the online sales of national retailers while only modestly increasing local brick-and-mortar revenues.” Taxes did not detract from online commerce in general; rather, they increased business for some of Amazon’s competitors, many of which might have collected sales taxes, too. What the study proved is that online consumers are price sensitive.

Even with their tax haven eliminated, pure online business will still have some unassailable advantages vis-à-vis pure brick-and-mortar merchants. E-commerce companies do not pay a premium for strategically located storefronts; they do not pay big-city wages to staff these stores; they sell to people living across the country, not just those living walking or driving distance from the store. Sales tax and shipping notwithstanding, e-commerce business can almost always offer a better price than physical stores.

The sales tax debate will become increasingly irrelevant as the distinction between online and offline businesses dies. Brick-and-mortar businesses have all been migrating to the Internet, especially now that the technology costs and other barriers-to-entry are so low. Conversely, many e-commerce businesses have gone from clicks to bricks, capitalizing on the unique experiences, customer service and publicity that only a store can provide.

At the same time, physical stores are digitizing. If mobile apps (or robots) guide shoppers through store aisles, answers questions, and process all payments, how “physical” is that store, really?

All commerce is becoming e-commerce. Businesses are all converging towards a blend of bricks and clicks. The introduction of online sales taxes will not change the competitive landscape, no matter what nonsense the doomsday prophets spin.

Jonathan Barsade is CEO of Exactor, which offers in-store, catalog and online merchants secure, reliable and accurate tax calculation, record keeping, tax processing, and other sales tax services through its fully automated, cloud-based SaaS sales tax compliance solution.

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