Posted by: Ann Treacy | November 27, 2012

Marketplace Fairness Act: a push to tax online sales rises up on Cyber Monday

According to ComScore via Bloomberg Businessweek

U.S. shoppers would likely spend a record $1.5 billion on Cyber Monday, $250 million more than in 2011, the company said.

Online spending throughout the holiday season is expected to increase 17 percent to $43.4 billion, ComScore said.

To put that number into perspective, the National Retail Federation predicts

holiday sales this year will increase 4.1 percent to $586.1 billion.* NRF’s 2012 holiday forecast is higher than the 10-year average holiday sales increase of 3.5 percent. Actual holiday sales in 2011 grew 5.6 percent

Online sales still make up less than 10 percent of overall sales. (Although I did see online sales predictions of up to $96 billion from Shop.org.) Perhaps a bigger note is that while overall sales is expected to increase 4 percent, online sales is expected to increase 17 percent. That should be incentive for shops to starting selling online. It is also incentive for brick and mortar shops to start looking at tax breaks for online purchases. Fans of online tax are using Cyber Monday as an opportunity to make their case and promote the Marketplace Fairness Act.

What is the Marketplace Fairness Act?

The Marketplace Fairness Act opens up online purchases to being taxed and requires states to simplify their tax laws…

The Marketplace Fairness Act grants states the authority to compel online and catalog retailers (“remote sellers”), no matter where they are located, to collect sales tax at the time of a transaction – exactly like local retailers are already required to do. However, there is a caveat: States are only granted this authority after they have simplified their sales tax laws.

The act offers two options for simplifying tax laws:

  1. Adopt the Streamlined Sales and Use Tax Agreement (SSUTA)
  2. Find another way to meet five simplification mandates listed in the bill

What is the impact?

Rep. Steve Womack (R) and  Rep. Jackie Speier (D) have posted an editorial promoting a change to online tax structure…

Businesses’ bottom lines often depend on Black Friday and the retail holidays that follow to provide a boost and put them into the “black.” Forty-six states and thousands of local municipalities also depend on these sales to generate tax revenues that support their budgets and the essential services they fund.

But an outdated Supreme Court decision has created a fundamental marketplace unfairness that costs states at least $23 billion every year and is killing our Main Street businesses.

Twenty years ago, when Quill v. North Dakota determined that states could not collect sales tax from remote — or out-of-state — sellers, our shopping habits were drastically different and it would have been impossible to predict how the Internet would change them. The same technology that has allowed the dramatic growth of the online retail marketplace has also significantly reduced the burden of complying with state tax laws.

Today, this relic of a Supreme Court decision allows online-only retailers to avoid collecting and remitting sales taxes. These online sellers are given up to a 10 percent price advantage, instead of competing on the price of the product itself. Consequently, while consumers everywhere are misled into believing their purchases are “tax free,” small retailers have become little more than a “showroom” for their online counterparts.

The responsibility of paying sales and use taxes is shifted to the consumer, who is obligated to track and pay these taxes at the end of the year. But enforcement is virtually impossible and only about three people out of 1,000 actually comply.

It’s a difficult decision to make. Given the context of the editorial, the question is: Do most people shop online to avoid paying taxes? If yes, then a change may move people to shop local or at least in-person. If no, then this bill isn’t a boost to local businesses as much as to local governments.  We may learn the answer to that question after the sales have been counted today (and throughout the holiday season) in California, which began charging tax on online purchases in September.

Do shoppers go online to avoid tax?

I tend to agree with Kelly Phillips Erb at Forbes, that tax isn’t the top reason many people shop online…

The aggressive imposition of sales tax on online transactions is supposed to make life more fair for those “brick and mortar” retailers – shops that you actually travel to in order to make a purchase. The argument has always been that taxpayers shop online because not paying sales tax makes items cheaper. I tend to believe that’s not true. I think people shop online for convenience, not for tax avoidance. As that gap between those retailers subject to tax narrows, it will be interesting to see what shakes out.

From the business perspective, I think there are businesses that thrive on online sales and those who don’t participate. Clearly more people are going online and that will have an impact on those who don’t sell online. Hillicon Valley highlights the perspective for folks who sell online only…

He [Sen. Jim DeMint (R-S.C.)] called the bill a “federal decree disadvantaging Internet companies by forcing them to collect sales taxes not only according to their state and locality, but across all 50 states and thousands of local tax jurisdictions.”

Online auction site eBay is lobbying against the bill. Brian Bieron, the company’s top lobbyist, warned earlier this year that an online sales tax would “harm many thousands of entrepreneurial small business retailers who use the Internet to stimulate economic growth, serve consumers and create jobs across America.”

To me the more compelling case is the impact of lost tax revenue on local/state governments, as exemplified in California…

For years, the Internet was generally considered a tax-free zone. However, as California’s budget shortfall has grown, the state has explored new ways of raising revenue. According to the tax law’s author, Assemblywoman Nancy Skinner (D-Berkeley), imposing this new fee could earn the notoriously cash-strapped state up to $500 million per year.

“When you’re losing that sales tax revenue, that means it’s affecting your roads, it’s affecting the resources for local government, it’s affecting the resources for education,” Congresswoman Jackie Speier (D-San Mateo) told CBS News


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