Taxing Internet Sales
posted on March 25, 2013 at 06:38PM by Paul Storch
Recently, a bipartisan group of senators offered a bill taxing internet sales nationally even in states the seller does not maintain a physical presence. The "Marketplace Fairness Act" is a non-binding resolution that passed the Senate overwhelmingly. This has long been a lively debate pitting Amazon, the 800 pound gorilla of internet selling, against the brick and mortar world where large chain stores must tax internet sales universally. This needs full congressional passage to become a law.
Tax proponents point to lost state sales tax revenue - as customers, who generally are legally liable to self-report the sale and pay up, rarely (if ever) do. Brick and mortar dealers add that "showrooming," where customers make use of their costly investments in displays and trained staff, only to purchase online, is an unfair advantage to online sellers. The savings on sales tax to the consumer on an expensive appliance in many cases overcomes the expense of shipping.
Tax opponents speak to the costly burden of tens of thousands of individual tax rates in every county in the country. To small businesses (although the bill proposes to exempt businesses selling less than $1 million in out of state sales), this may seem like an insurmountable hurdle to doing business. There is also the idea that the internet has enhanced competition through transparency, thus making products more affordable and the marketplace more efficient. Opponents also argue that taxation may drive online sellers offshore, where they will remit no taxes at all and there will be less recourse to customers with disputes.
Manufacturers struggle to adopt an internet policy that is both fair to their existing channels of distribution, yet does not exclude the sizable growth opportunities presented by the internet.
The history of retailing in America has followed trends in transportation, communications, technology and lifestyle. Prior to World War II, retailing was dominated by general stores, "mom and pop" retail, catalog houses, five and dimes, and some department stores in large cities. Post-1945, the trend to the cities and suburbs prompted the growth of chain stores. The appliance industry saw dozens of regional chains form and grow during this period.
This was followed during the 1970s for 20+ years by the category killers and big box stores, which killed off legions of independent retailers and many regional chains including many appliance and electronics retailers. Home Depot and Lowe's changed the entire paradigm of how hardware and building materials came to market. During the end of the 20th century and the beginning of this century, change continued with the growth of membership warehouse clubs, specialty retail, and the continued growth of big box retail challenging even the category killers and smaller national and regional chains of the prior period.
Internet retail, a phenomenon of the past two decades, can be viewed as revolutionary or merely the natural evolution of retail adapting to available technology. Certainly, the fact that TV, movies, music and books are really digital content, and no longer need a physical distribution system is obvious after the fact. Yet, retailers such as Borders, Blockbuster, Tower Records and many more were certainly caught napping. Fortunately for those of us in the appliance industry, absent the science fiction of a Star Trek transporter, our product still needs factories, warehouses and trucks to get to the consumer.
The sales tax proposal by Congress, whatever the outcome, will have winners and losers. And it will cause the retail landscape to continue its evolution. I try to avoid predictions, but I will make one here: the national retail tax on internet sales will eventually come. My reasoning is that if not, one or more tax-starved states will impose their own tax on internet sales. This will create chaos in the marketplace and the federal government will act.
The US Constitution authorizes Congress to regulate interstate commerce. My thoughts on the internet tax issue are as follows:
- I would urge our representatives to regulate sensibly. Excessive regulation has both a measurable and unmeasurable cost to business. We can count the man-hours spent filling out tax returns or the dollar expense of outsourcing this service. But we cannot calculate the drain of management talent working on non-productive activities, and the discouragement of creativity. Congress should assure that any change be sensitive to both consumers and small business. Overly complex regulation tends to be both inflationary and anti-competitive.
- Brick and mortar and internet resellers (and these days many retailers are both) should be considering the consequence of the tax, if and when it happens. Any change in the ground rules creates both opportunities and threats to any business. But prudent businesses don't want to be caught unawares if it happens before they are ready.
- Successful retailers, whether online or physical, offer a value proposition to their customers. It may be service, selection, reputation, staff expertise, display, convenience, price, or some or all of those. But if yours depends on allowing customers to escape their local sales tax, it may be time to reconsider the business model.
-Paul Storch, CEO