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What’s Fair with Taxing Online Merchants?

November 7th, 2010 · No Comments · Green and Profitable

Friday, I got a press release from the American Booksellers Association, crowing that a lawsuit against New York State’s “sales tax fairness” law–which states that any company using affiliates based in New York has a “nexus” in the state, and thus is subject to sales tax–had been dismissed on most counts.

The question of sales tax fairness has been a bone of contention between mail-order/online and physical stores for more than a decade (I wrote a piece about this ten years ago, in fact). Brick-and-mortar retailers claim that mail-order and (more recently) online merchants have an unfair price advantage because they don’t have to charge and remit sales tax. The remote merchants claim they aren’t actually doing business in the state, and that shipping charges shift the inequality back out. However, sales tax is usually a lot more than shipping, especially for small items like books and CDs.

As a very tiny online merchant who sells info products online and through the mail, my issue is a bit different. I do see it as unfair that we onliners don’t have to collect sales tax. However, it would be a crushing burden to have to collect and remit taxes in the hundreds of jurisdictions where our customers live—California alone has a different tax structure for almost every community, involving state, county, and local taxes in varying amounts. And what happens with international sales? Such a requirement would force hundreds, perhaps thousands of merchants to close or drastically reconfigure their businesses.

So what would be fair? Here are a couple of ideas.
1. Tax all purchases in the merchant’s home jurisdiction. On the plus side, merchants are already set up to collect and pay these taxes; all we’d have to do is change our order forms to collect tax on all product purchases. On the minus side, this would skew revenues. Aamzon’s hometown of Seattle or eBay’s of San Jose would benefit enormously, while small municipalities (or those who don’t happen to have a mail-sales megagiant in their borders) are left out in the cold. Probably not the best solution.

2. Collect sales tax in a national pool at the same fixed rate for all localities, use software to allocate it by purchase amount purchaser’s zip code, and distribute it, less a small administrative fee (perhaps 1 percent of all the tax collected).

3. Provide free software to every merchant that would determine and automatically debit the proper tax without adding administrative burdens.

Both 2 and 3 potentially could be cheated by a skilled hacker, which makes me nervous.

4. Eliminate the sales tax entirely for both physical and virtual businesses, and replace the revenues with income tax or some other mechanism. In today’s political climate? I think this would be a non-starter.

In short, I don’t think we have the answer yet. But I agree with the ABA that the current system of a free ride for the virtuals and a big squeeze on the physicals is not equitable (and has probably contributed to the sad demise of so many downtown storefronts)


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