Sales Taxes Will Have No Impact on eCommerce Businesses

taxes

Since 1992, the Internet has been a duty free zone, exempt from the responsibility of collecting sale tax. Over the last few years, some brave politicians have fought to level the playing field for offline and online business. Most recently, Representative Jason Chaffetz of Utah introduced H.R. 2775, the Remote Transactions Parity Act (RTPA), a bill that has come under fire from lobbyists bent on maintaining the status quo. They claim that the RTPA will be cataclysmic for ecommerce.

This is all spin. If the RTPA passes, it will have no impact whatsoever on the growth and success of ecommerce. Business will continue as usual.

Critics of the RTPA are ignoring and distorting facts to fit their own narrative and delay the inevitable passage of a bill. The spin artists insist that under the RTPA, small business will have to pay thousands of dollars in software implementation fees and audits. They claim that administering an ecommerce sales tax system will be a nightmare for state governments. They seem to believe courts will be inundated with litigation.

The reality is that small businesses won’t pay a dime for sales tax software – the states will cover all costs, under the RTPA. The burden and associated expenses of an audit will fall the on the software providers, not businesses. Automating sales taxes will make the system easier to administer by eliminating a lot of human error, manual data entry and physical processes.

There will be no legal deadlock, either. In fact, the Supreme Court has already expressed interest in revisiting Quill Corp. v. North Dakota, the case that enabled the Internet to become a duty free zone in the first place. In Quill, the court ruled that remote sellers do not have to collect and remit local sales taxes unless they have nexus in the state where the customer lives.

Although Quill involved a mail order business, the ruling was applied to ecommerce, and initially, no one worried. Ecommerce was a miniscule part of the U.S. economy. But as Justice Anthony Kennedy argued in a recent opinion, “A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier.” States are losing revenue, and physical retailers are effectively subsidizing infrastructure and other state resources that online retailers need to sell and deliver their goods.

When the Supreme Court ruled on Quill, collecting taxes across 10,000 jurisdictions was considered an “undue” burden. Since then, software providers have automated that entire process. Collecting sales tax in 10,000 tax jurisdictions is no harder or easier than collecting it in one locality.

Critics of the RTPA conveniently ignore that fact that many states already require ecommerce business to collect sales taxes. The so-called ‘Amazon Tax’ has been implemented in 25 states, and its namesake is doing just fine. Amazon generated $23.18 billion in sales during Q2 – a 20 percent year-over-year gain. Product sales, in particular, were up nearly $2 billion over Q2 2014. The company reported $92 million in profit, which is rare for the ever-expanding ecommerce giant.

Academic researchers have also demonstrated that sales taxes do not harm ecommerce.“The Amazon Tax: Empirical Evidence from Amazon and Main Street Retailers,” a paper from three Ohio State University professors, 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 collecting sales tax.

Here’s the thing: 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 premium items (over $300), consumers were even more likely to shift purchases from Amazon to another merchant. 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.”

Sales taxes did not hurt ecommerce. Instead, they increased business for some of Amazon’s competitors, many of which might have collected sales tax, too. It’s important to note that the researchers only looked at a 12-week period immediately following the implementation of the Amazon Tax. Amazon could have easily won back the customers that temporarily shifted their spending to competitors.

Even with the burden of sales taxes – a burden physical retailers share – ecommerce businesses will thrive because they have some unassailable competitive advantages. Pure e-tailers like Amazon do not pay a premium for strategically located storefronts; they do not pay big-city wages to staff these stores; they sell nationally and often internationally. They’re not limited to a customer base that lives walking or driving distance from the store. All these advantage mean that ecommerce businesses can always offer a lower price than physical stores, sales tax and shipping notwithstanding.

Fundamentally, the debate over online sales tax is an issue of equality. When an online and offline business sell the exact same goods to the exact same types of customers, how can the government require one to collect taxes but not the other?

This debate has a limited lifespan. The RTPA or a near equivalent will pass. The distinction between online and offline business will crumble soon enough. Thanks to the rise of digital wallets and mobile payment solutions, physical stores are becoming de facto ecommerce businesses. Likewise, many ecommerce businesses are going from ‘clicks to bricks.’ All commerce is becoming ecommerce.

It’s remarkable that the internet has remained a tax haven for this long. Perhaps the lobbyists are holding out for even more concessions than the RTPA offers. Perhaps the spin artists have come to believe their own tales. The important thing is that the online sales taxes will not hurt ecommerce. The Internet will survive.

 

About the image:  The above image of people giving their tithe was found on Wikimedia Commons. https://commons.wikimedia.org/wiki/File%3AZehent.jpg

 

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