It’s Retailer vs. Retailer in Internet Sales Tax Push

Ellen Allen opened a retail store, Ellen Allen Annapolis, in Annapolis, Md. Previously her line had only been available online. Photograph by Paul W. Gillespie/The Capital via AP Photo

Ann Whitley Wood built her EBay consignment store, Willow-Wear, from a hobby into an $800,000 business during the past dozen years. The former Dallas appellate attorney, who has worked full-time on the venture since 2005, worries proposed federal legislation would saddle her and other Internet sellers with the complex and time-consuming task of collecting state sales taxes.

The Marketplace Fairness Act, and similar legislation that attracted bipartisan support, died in 2012’s extraordinarily unproductive Congress, but Senator Lamar Alexander (R-Tenn.) on Wednesday announced plans to reintroduce it. Boston CPA Sylvia Dion, who has written extensively about Internet sales tax, believes some version of the legislation has a fair chance of passage given the bipartisan support the issue attracts and its growing number of supporters—if Congress is more effective this year.

The legislation is aimed at boosting revenue by allowing states to collect sales tax on all purchases made by residents, including those made online. It has pitted brick-and-mortar retailers small and large, who must collect state sales tax on all purchases, against Web-based companies that only are obliged to collect taxes in states where they have a physical presence, such as a warehouse or sales office.

The long list of supporters includes state governors, who claim they are missing upwards of $20 billion in lost state tax revenue, local mayors, big-box retailers, labor groups, booksellers associations, and the National Retail Federation. was initially opposed but has also become a supporter as it has increased its physical footprint throughout the country. The opposition includes EBay, conservative research groups such as the Heritage Foundation, and e-commerce advocates including NetChoice.

Under U.S. Supreme Court decisions dating to 1967 and 1992, out-of-state retailers have been shielded from state sales tax collection due to concerns about impeding interstate commerce. A handful of states, including California, Illinois, and Georgia, have passed so-called Amazon laws in the past two years, aiming to collect sales tax on purchases made through Internet companies that advertise to their state residents online, says Daniel Wagner, an accountant specializing in state and local tax practice at Kaufman, Rossin & Co. in Boca Raton, Fla.

But those laws are not widely enforced or understood by most Internet sellers.

“I think the Supreme Court got it right in 1992,” Wood says. “I have no business collecting sales tax in Vermont, and I don’t think the buyer there is going to understand why they have to pay it.” She rejects the idea that the current system favors online retailers, noting that many physical stores also do Web sales and that shipping charges level the playing field substantially. She estimates it would take her six weeks a year to comply with sales tax procedures in the 45 sales tax-collecting states, which have close to 10,000 local jurisdictions that may charge different rates.

“Most e-commerce companies require little in the way of state-provided services and infrastructure, so it doesn’t make much sense to collect a sales tax. Brick and mortar stores, on the other hand, require local roads, police and water supplies,” Ken Johnson, chief executive officer of online men’s underwear company Manpacks, wrote in an e-mail. Jeff Milchen, co-director of the American Independent Business Alliance, rejects that argument because “local businesses are paying employee and property taxes that remote sellers are not, and everyone uses the airports and highways and local roads. Internet sellers could not do business without the infrastructure to ship their products.”

Carol Peppe Hewitt, director of Slow Money North Carolina, says the disparity in sales tax collection obligations puts small, local businesses at a disadvantage. “Internet sales should be tied to whatever the state sales tax is required in each state,” explains Hewitt, who co-owns Hewitt Pottery in Pittsboro, N.C., with her husband, potter Mark Hewitt. “We need to level the playing field.”

The 2012 legislative proposals took small business owners into account, exempting companies either under $500,000 or $1 million in annual revenue. Brian Bieron, EBay’s senior director of global public policy, believes the exemption should be significantly higher. “Small business retailers using the Internet are innovators using technology to grow a business, create jobs in communities across the country, and serve consumers with a competitive alternative to the established retail giants,” he wrote in an e-mail. “A meaningful small business exemption needs to be a part of any new Internet sales tax regime to protect this important engine of growth and entrepreneurship.”

R. David Campbell, CEO and co-founder of TaxCloud, an online sales tax processing service that launched in 2010, argues exemptions are unfair. “Most local small retailers would love to have exemptions as well, but they don’t,” he says. “From a tax policy perspective, a small seller exemption makes no sense.” Campbell has done extensive lobbying for the Internet sales tax legislation because his 14-employee, venture-backed Seattle company stands to gain millions if it is passed.

TaxCloud is one of a handful of companies state-certified to do online sales tax collection, he says. His service meshes with Internet shopping-cart systems to add state and local sales tax charges to customers’ checkout screens based on their zip codes. It does not cost retailers a cent or require them to memorize tax rates or remit funds, he says; the service is paid for by the states getting the tax revenue.

Small business’s fears about cost and complexity are outdated because of solutions like his, Campbell says: “It used to be complicated and expensive, but it’s not anymore. As Congress moves forward on this, we won’t be the only free providers out there.”

Wood is skeptical: “I just don’t really believe it would be that easy. I’ve had a lot of software problems over the years, and my company would still be in charge of this tax collection no matter what software is used, and subject to audit and compliance,” she says. “I hope they don’t do this. We cannot be putting more small companies out of business.”

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