If a resident of New York State buys an Airzooka toy air gun from Sillyasstoys.com, it will cost $24.95 plus shipping.
If the same person buys the same product online from Toys R Us, the price is $26.99, plus shipping and New York’s sales tax, which can be as high as 8.75 percent depending on the county.
The reason why Sillyasstoys.com, which describes itself as a “Unique & Unusual Children’s Online Toy Store,” is not charging New York sales tax: it is based in Virginia and has no physical presence in the Empire State.
The US Senate, however, as part of its budget resolution, voted last week to approve the Marketplace Fairness Act, which would require any e-commerce business with over $1 million in sales to charge sales tax. In other words, if Sillyasstoys.com has over $1 million in sales, it would have to charge New York sales tax for any toys shipped to New York or any other state with a sales tax. Yes, add $2.18 to the toy.
Brick and mortar retailers have been lobbying Congress for years to try to pass the legislation. They maintain that it will “level the playing field” between themselves and e-retailers who only sell their goods online. And, many of the states with uncollected sales taxes foresee billions of dollars in new tax revenues if the legislation is enacted. According to one estimate there are about $23 billion in uncollected state e-commerce sales taxes each year.
However, conservative groups argue that forcing e-retailers to pay a sales tax when they have no physical presence in a state is unconstitutional. The US Supreme Court has said they don’t have to pay the sales taxes if they don’t operate in that state.
“Erasing the physical presence requirement allows states to reach across borders to a degree they can’t now,” says Pete Sepp, executive vice president at the Washington-based National Taxpayers Union, which believes in lower taxes and limited government. “Physical presence is a key Constitutional protection.”
The pro-sales tax organizations, however, interpret the 1992 US Supreme Court decision (Quill v. North Dakota) as still unsettled. As part of the ruling, the court said, “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect use taxes.”
Since that ruling no marketplace fairness legislation has passed Congress despite the best efforts of some powerful lobbying groups allied under the umbrella of the Marketplace Fairness Coalition to change the law. Among the supporters are the AFL-CIO, the National Governors Association, the National Retail Federation, and businesses such as Wal-Mart and even Amazon.com, which is setting up distribution centers in states across the country.
But they are pushing against some conservative Republicans. Last month, 16 free-market organizations, including Grover Norquist’s group, Americans for Tax Reform, signed a letter opposing the legislation. In addition, the legislation is opposed by the NetChoice coalition, which includes companies such as AOL.com, eBay, Facebook and News Corp.
Last month, the conservative Heritage Foundation said the proposed bill would turn every out-of-state retailer into a sales tax collector for nearly 10,000 separate state, local, and municipal tax jurisdictions, and it called the proposed legislation “a dangerous extension of state power into other states.”
The Heritage argument resonates with a key Republican lawmaker, Rep. Bob Goodlatte of Virginia, who is also the chairman of the House Judiciary Committee, which has jurisdiction over interstate commerce.
In a statement to the Monitor on Tuesday, he said, “There is also concern that despite disclaimers, the bill could open the door for states to tax or even regulate beyond their borders.”
Congressman Goodlatte says he can see both sides of the argument. “Brick and mortar retailers must compete with Internet companies that do not have the same sales tax collection responsibilities,” he said in his statement. “I understand the concerns of retailers on this issue.”
However, he worried the complexity of state sales taxes could be a burden.
“All of that being said, I do not believe legislation like the Marketplace Fairness Act is sufficiently simplified yet. While it attempts to make tax collection simpler, it still has a long way to go. There is still not uniformity on definitions and tax rates, so businesses would still be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions,” he said. “I am open to considering legislation concerning this topic, but these issues, along with others, would certainly have to be addressed."
In an effort to address this issue, the proposed law requires that state sales taxes be “simplified.” According to David Quam, director of federal relations for the National Governors Association, simplification means the information is provided to retailers on the state laws and that software is provided for free on how to figure the tax. He says there are service providers who have programs to help retailers pay the taxes automatically.
However, some small business experts believe it could be more costly for a truly small business to comply with the law.
According to CPA Jody Padar, a Xero Partner and CEO of New Vision CPA in Arlington, Ill., there could be a need for professional help for small businesses because of the complexity of state sales taxes. “Take the online sale of candy,” she says. “Every county may have a different sales tax, and it may even depend on the sugar content of the candy as to whether or not it needs to be considered for tax.”
Getting an accountant involved in understanding sales taxes will cost money. Ms. Padar estimates it could cost a small business an extra 10 percent to get a CPA to help out. “Sometimes the cost of compliance cost more than the value of the product you’re selling,” she says. “I guess it could help my business.”
She suggests moving the exemption out to $10 million. “I don’t think that would affect them as much,” she says. “But, I just don’t know how to do this without a negative impact on small business.”
Some e-commerce businesses say they are resigned to eventually seeing the new law. “Now that e-commerce is as big as it is, it’s time for it to pay its fair share,” says Jay Whitehead, CEO of Tickets-for-Charity.com, a $20 million organization based in Boston. “The administration of it could be a little complicated, but if you have to collect it you have to collect it.”