As a result of the 1992 Supreme Court ruling on
Quill Corp. v. North Dakota
, businesses were not required to collect sales taxes on behalf of
state or local governments unless the business had a nexus of
operations in the state. That ruling gave a price advantage at
least the size of the sales tax to mail-order and/or Internet
companies over traditional bricks-and-mortar establishments.
The price advantage is not chump change. According to the
of State Legislatures
, states lost $18 billion in uncollected taxes in 2008, of which
$7.7 billion were the result of online transactions. They estimate
that lost tax revenues will jump to $23 billion in 2012, with
roughly $12.5 billion coming from e-commerce.
With local retailers struggling from the price disadvantages
amid the weak economy and state and local governments in need of
revenues after the housing bubble crash, new laws have been enacted
with limited success that force Internet retailers to collect sales
That is likely to change, however.
Click to enlarge images.
Online Vs. Bricks-and-Mortar
) and the state of California came to an agreement in 2011 that
required the company to start collecting state and local sales
taxes beginning in September 2012. Amazon agreed to set up a
fulfillment center in San Bernardino. In return, San Bernardino
extended tax breaks to Amazon that nearly equaled the local taxes
Amazon was set to collect.
Similar agreements were negotiated between Amazon and the state
of Texas, forcing the e-retailer to collect the 6.25% state sales
tax on all sales starting July 1, 2012. Another agreement with the
state of Nevada will call for Amazon to collect that state's 8.1%
sales tax beginning on Jan. 1, 2014.
As Amazon goes, the rest of online retailing will follow.
Bipartisan support in Congress is growing to pass the
Marketplace Fairness Act
. Once enacted, this law would standardize the collection methods
of sales taxes for online transactions, which would make it easier
for companies to comply with state and local sales tax laws. Small
businesses with sales of less than $500,000 would be exempt from
There is also the Marketplace Equity Act, which is a similar
bill and was introduced in the House instead of the Senate. The key
difference is that this bill says small businesses with sales of
less than $1 million, or less than $100,000 in a specific state,
would be exempt from the requirements.
) is a proponent of the bill (one of the authors of the legislation
is Republican Representative Steve Womack from the company's
district in Arkansas). The company has been stepping up its
lobbying efforts as it faces increasing competition from online
retailers such as Amazon.
In essence, Amazon is being proactive and positioning itself for
the inevitable. By negotiating peacefully before Congress acts,
Amazon is able to reap the benefits of large tax breaks, whereas
other online retailers will find themselves stuck with less
competitive prices without any recourse.
From an Economic Perspective
average state and local sales tax rate is over
. Yet, state and local governments are only collecting an effective
rate of 6.8%. A large portion of the spread between the actual and
effective rates was the result of stronger online demand,
especially over the last few years. The Marketplace Fairness Act,
or something similar, would mitigate some of the loss.
Some lobbyists for the online retailers are contending that
these new requirements are actually a new consumption tax. That is
not necessarily true.
All 45 states that have sales taxes require consumers to collect
the tax on online transactions themselves and submit them when
filing taxes each year. States, however, lack proper enforcement
gauges and audit abilities. Thus, most consumers understate the
sales taxes they actually owe. The benefits to state and local
governments and bricks-and-mortar retailers should outweigh the
decline in consumers' disposable income.
State and local governments currently have nearly $3.0 trillion
in outstanding debt. While the recovery of lost tax revenue will
not be enough to pay off the debt, it will help prevent more cuts
to projects and services until the economy fully recovers.
On the business side, retailers like Best Buy (
) will see their prices become more competitive with online
retailers. That should boost overall retail sales, increase
profits, alleviate pressure to cut payrolls further, and improve
At the same time, online retailers like Amazon generally do not
have large workforce or sales staff. The loss of online sales will
lower online retailer profits, but should have few negative effects
on overall employment levels.
That means the collection of sales taxes by online companies
should result in a net gain in aggregate wages as stronger
employment levels at bricks-and-mortar establishments more than
offset the potential losses from online retailers.
From a Corporate Perspective
Examples of online retailers and competing bricks-and-mortar
stores include the following:
- Amazon.com vs. Barnes & Noble (
), Best Buy and Wal-Mart
Reports in the
Wall Street Journal
suggest that Amazon may be deploying new fulfillment centers as a
way to initiate same-day delivery. That would eliminate the main
advantage that bricks-and-mortar establishments have over
Thus, Amazon would not only see benefits from tax breaks, but
demand for its products would increase as consumers are able to
receive purchases without shipping delays. That thought will likely
be a key point of contention going forward for bricks-and-mortar
retailers aiming to level the playing field with Amazon and other
- Blue Nile (
) vs. Harry Winston Diamond (HWD), Tiffany (TIF), and Zale
Blue Nile said in its most recent 10-K that "net sales may be
negatively affected if we are required to collect taxes on
purchases and/or disclose our customers' private information to tax
authorities." The company currently only collects sales taxes in
Washington, New York, and certain foreign countries.
- Overstock.com (OSTK) vs. J.C. Penney (JCP), Kohl's (KSS),
Macy's (M), and Sears Holdings (SHLD)
Overstock also discussed the sales tax issue in its most recent
10-K. The company said "new state tax regulations in states where
we do not now collect state and local taxes, may subject us to the
obligation to collect and remit state and local taxes, or subject
us to additional state and local sales and income taxes, or to
requirements intended to assist states with their tax collection
efforts." It believes these tax collection obligations could have
an adverse effect on cash flows and results of operations, as well
as the possibility the company may be subject to "significant"
fines or other prepayments for any past failures to comply with
Finally, eBay (EBAY) has been campaigning against federal
legislation. The company is different than the online retailers
mentioned above because it provides a platform for other retailers
to sell products. It does not, however, collect taxes on goods or
services sold by users of eBay.
The company said in its most recent 10-K that "collection
responsibility and the additional costs associated with complex use
tax collection, remittance and audit requirements would make
selling on our websites less attractive for small business
retailers, and would harm our business."
The company expects online sales tax to happen at some point. It
said during its second-quarter conference call that the goal is to
mimic efforts in California, where it worked with legislature to
create a small business exclusion for retailers who sold less than
$1 million in the state.
From an economic perspective, there is little negative impact --
and perhaps some positive impact -- from an increase in tax revenue
and a more level playing field in the retail sector.
From a corporate perspective, the battle is only in the initial
stages. As the political story plays out, other online retailers
are likely to go the route of Amazon (and eBay) by negotiating
regional/state agreements to mitigate the impact of potential tax
At the end of the day, online retailers have gotten away with
not paying/collecting taxes. Eventually, that will come to an
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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