This Monday, the Senate passed a bill to increase the ease with which states collect tax for online purchases. The Marketplace Fairness Act – which passed 69 to 27 – still must pass the Republican controlled House and receive President Obama’s signature. Even so, it has already been cause forclamor amongst mid-tier online retailers who will likely be the hardest hit by its effects.
If passed, the bill would require online retailers with sales at or above $1 million to collect sales taxes for the states to whichthey ship goods. According to the U.S. Department of Commerce, FY 2012 online sales rang up at $225.5 billion. In tax revenues alone, billions are at stake.
If the act passes, major retailers and local brick & mortar stores could stand to gain quite a bit. National and regional chainshave long endured deceiving foot-traffic: window shoppers whose only intent is to test a product in person before buying online. According to some estimates, ecommerce’s built in ‘tax shelter’ puts retail chains at a 5 to 10 percent disadvantage.
In a recent USA Today article Stephen Sadove, Chairman of the Board of the National Retail Federation and CEO of Saks Fifth Avenue, weighed in on the impending ramifications of Marketplace Fairness Act. “Retailers compete for customers on many different levels…but they cannot compete onsales tax. Retailers of all shapes, sizes, and channels deserve a level playing field.” The creation of a level playing field is, of course, the purported intent of the Marketplace Fairness Act. While there is a considerable collection of detractors, state governments are not among them. Collecting sales tax on previously-untouchable online purchases promises much needed relief to over-burdened state budgets.
That being said, sales tax varies dramatically from state to state, both in terms of amount and application. For example, New York City sales tax on clothing purchases over $110 is 4%; whereas New Jersey state sales tax on clothing is nonexistent. In New Hampshire, on the other hand, a statewide sales tax doesn’t even exist.
There are also many specificities behind what does and does not constitute taxable merchandise. Surprisingly, pumpkins provide what is perhaps the deepest insight into the tangled web of complexities that is the state sales tax system: A pumpkin purchased in its raw state (undressed, un-carved, and otherwise unadorned) is considered a food item, and is therefore not taxable. However, the moment apumpkin is decorated in any way, it is no longer considered a food item and is therefore subject to state sales tax laws [NJ Sales and Use Tax Guide].
If pumpkins are any indication, a blanket-style enforcement of the Marketplace Fairness Act will be a very difficult proposition. Furthermore, since the act would require states to simplify their tax codes and provide software and assistance to retailers in order to facilitate the change, just how much states stand to benefit remains up for debate.
On the ecommerce end of the equation, many small businesses are highly concerned by the extensive administrative and logistical costs of collecting and remitting sales taxes for every state. Such collection and remittal overhead costs could very well bankrupt small-tier online retailers. What’s more, eliminating e-commerce’s tax-exempt status would inevitably drive prices up – thus increasing competition and further damaging small and mid-tier businesses.
The fate of the legislation now rests in the hands of the Republican-controlled House. But regardless of its outcome, the bill has breached a very hot-button issue that’s been on the tip of more than a few tongues for some time now. The online sales tax dialogue has been opened – and it’s notgoing to close anytime soon.
update may 9
Catalogers and online retailers certainly are not happy. While some agree the tax is fair, most are opposed to collecting by jurisdictions. Says Carl Szabo, Policy Counsel at NetChoice, “The bill needs to be simple, it is not fair to make us collect from 9600 jurisdictions,” said Szabo. “We need to simplify this and we need to bake in simplification before this bill goes forward.”MultiChannel Merchant: Catalogers Weigh In on Marketplace Fairness Act