States, Congress rallying for an e-sales tax
By Amrita Jayakumar,
Online shopping in the Washington region is about to become more expensive.
A wave of states, including Virginia, have passed laws that will require consumers to pay sales tax on all Internet purchases as soon as next year. Other states and the District are pursuing similar measures. And in Maryland, Gov. Martin O’Malley (D) wants to go further and levy a tax on songs and other digital products bought through popular sources such as iTunes.
For states struggling in the troubled economy, this could mean $23 billion in new revenue each year, according to the National Conference of State Legislatures. Had online retailers collected sales tax this year, Virginia would have added nearly $423 million to its coffers, while Maryland would have seen $376 million and the District $72 million, the group said.
The movement in state capitals is driving newfound support for a proposed bill in Congress that could make collection of sales tax a standard practice on the Web, no matter where a consumer logs in to shop.
Bricks-and-mortar retailers are cheering the moves. For years, their online rivals have resisted charging sales tax, giving them a price advantage. They have cited a 1992 Supreme Court ruling that let online companies off the hook if they didn’t have a physical presence in the state where the customer lived.
A Web trade association that includes eBay, Overstock.com and Facebook is fighting the new bills. But notably, Amazon.com appears to have waved the white flag and supports the sales tax measures. Some analysts said they observe a shift by the online retailing leader that could lead to a fundamental change to the rapidly growing e-commerce business.
Technically, when consumers shop online, they are supposed to pay sales tax by reporting it on their state tax returns. But as it turns out, Americans aren’t always honest when it comes to paying their taxes.
For that reason, traditional retailers say their online counterparts should collect sales tax when a consumer makes a purchase.
Prices are so low online that retailers have long decried what they call the “showrooming” effect. Customers visit shops, try out different products and then buy them cheaper online, sometimes on their smartphone while they are still standing in the store.
“You’ve been doing all of the work and then the online competitor steals the sale,” said David French, senior vice president of government relations at the National Retail Federation, a trade group.
Online shopping has shown no signs of slowing down. Last year, it generated $200 billion in revenue. In the first three months of this year, e-commerce jumped by 15 percent over the first quarter of 2011. Meanwhile, total retail sales grew 6 percent over the same period, according to the Commerce Department.
“All retailers want is a level playing field,” said Jason Brewer, vice president of communications and advocacy at the Retail Industry Leaders Association, an Arlington County-based trade group.
Hungry for revenue
After the recession, states had to find a way to plug holes in their budgets. It was impossible to ignore taxes that were already owed to them by law.
California, hit particularly hard by the housing bust, pressed Amazon to collect sales tax because its local online affiliates — smaller sites that direct traffic to its Web site — were in the state. After a long and bitter fight last year, Amazon agreed to add the tax, which goes into effect in September.
Then Texas, a huge market for Amazon, argued that the company’s Dallas distribution center constituted a physical presence. After a similar battle, Texans this month started paying sales taxes on Amazon purchases.
In the course of these clashes, Amazon’s approach to dealing with states seemed to change. Rather than threatening to shut down distribution centers or cut ties with online affiliates, the retail giant started cutting deals with state governments, analysts said. Amazon will begin charging sales taxes for customers in eight states, including Virginia, over the next four years. It currently collects sales taxes in six others.
The shift probably had to do with its ambitious expansion plans, said French, the National Retail Federation vice president.
“Amazon’s business model is changing,” French said. “It wants to be moving towards more rapid delivery.”
To do that, it needs to open more distribution centers around the country.
Amazon has complained that collecting state sales taxes is too complicated and has long backed federal legislation to make the practice more straightforward. The latest federal proposal — the Marketplace Equity Act — has strong bipartisan support and appears to be moving forward.
“We strongly support passage of the Marketplace Fairness Act because it’s time to resolve the sales tax issue,” said Scott Stanzel, a spokesman for Amazon.
The bill proposes that a state can decide whether to enforce collection of its sales tax. If the state chooses to, then it should simplify its tax system according to conditions outlined in the bill.
Sales tax rates generally range from 5 to 10 percent, depending on the type of product as well as the jurisdiction (cities and counties can impose their own taxes on top of state rates). In Maryland and the District, many items are taxed at 6 percent, while in Virginia, the sales tax generally hovers around 5 percent.
Traditional retailers with an online presence, such as Barnes & Noble, Wal-Mart and Target, also support the bill, as do groups such as the National Retail Federation and the Retail Industry Leaders Association.
On the other side is NetChoice, the trade association of e-commerce companies. NetChoice has opposed sales tax collection and overturning the physical-presence ruling by the Supreme Court. Its argument, which Amazon has used in the past, is that tax calculation for thousands of jurisdictions countrywide is an impossibly complicated task.
“The burden falls disproportionately on a small business,” said Steve DelBianco, executive director of NetChoice. “It has no accounting or IT staff to keep track of tax rules and holidays.”
The new bill exempts online businesses making less than $500,000 a year from collecting sales tax. NetChoice says that threshold is too low. It also notes that the amount states will gain from online sales taxes is less than 1 percent of total state tax revenue.
The measure, sponsored by Sens. Mike Enzi (R-Wyo.), Richard J. Durbin (D-Ill.) and 12 others, was introduced in November. The House Judiciary Committee is set to hold a hearing on it July 24.
Amazon said that even with the tax, it expects a minimal impact on its sales.
“They’re still winning on price for the most part, even as they collect taxes,” said Mark Miller, an equity research analyst at William Blair & Co.
Still, local retailers hope the sales tax measures will give them a chance to compete.
“I’ve got to file a form every month, and I’m only one tiny business,” said Val Morgan, owner of Idle Time Books, a 30-year old bookstore in Adams Morgan. “If I can do it, surely Amazon can.”