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Are You Ready for An Internet Sales Tax? The Marketplace Fairness Act

Sales Tax RegisterFor those of you that are used to shopping online, get ready. You may soon be paying sales tax for your online purchases. The Marketplace Fairness Act looks like it will be passed in the Senate next week. There are also signs pointing towards it passing in Congress as well. If it all goes that way that, which it looks like it will, you’ll be paying a sales tax on your online purchases soon. That is of course if you live in a state that collects sales tax.

This law will not create a new sales tax targeting online sales. It will simply make it mandatory to collect sales taxes which are already supposed to be paid. States that do collect sales tax have lost significant revenues because of the inability to enforce sales tax collection for online sales. One widely respected study estimates that a total of 11 billion dollars were lost in revenue in 2012.

Who Gets Impacted by the sales tax

One of the complaints you’ll see is that it is unfair to the small online retailer since it will create an administrative nightmare of trying to collect sales tax for 45 different states. Collecting the sales tax, sorting it out and paying the right amount to the respective states can be an administrative challenge to a large business. That sounds like a nightmare in itself but its all BS. The small online retailer is not going to be impacted unless they have more than one million dollars in revenue. That will be the cutoff where an online retailer will have to start collecting and distributing sales tax.

Presumably, if you have one million dollars in revenue you can afford the complication and administrative burden this could create. The mid-size business in that revenue range will probably be the hardest hit. One million dollars in revenue may sound like a huge amount, but if you’re working with a high volume, low margin business model, you may not be able to afford the additional burden this would put on you.

I think that this law, if it goes into effect, has the potential to really hurt the medium sized online businesses, which is a shame since they have the most growth and job creation potential. There are discussions to raise this revenue cutoff to ten million dollars. I believe that would be a much more reasonable number to use as a cut-off. We’ll have to wait and see what the bill ultimately ends up looking like.

The “Amazon” Factor

This probably explains why one of the biggest “anti-sales tax” giants, Amazon is a big proponent of this law. That is correct, the behemoth that has always fought tooth and nail against collecting sales tax for the states is firmly behind this law! Here’s a new law that has the potential to take the teeth out of their smaller competitors. It might actually drive some of these mid-size online retailers to move their storefront to Amazon since I’m positive that Amazon would collect and sort their sales taxes for them for a fee of course.

Let me be fair to Amazon though, the real reason they are supporting this new law is more basic than that. They are currently limited on where they can locate their brick and mortar facilities. If they have a physical presence in a state, they have to collect sales tax for that state. In the past this has led to some pretty harsh restrictions. A good example of that is North Carolina, Amazon will not allow you to be an affiliate if you are located in North Carolina. The reason for that is that North Carolina law recognizes affiliates as an extension of the company itself and that would force Amazon to collect sales tax for North Carolina sales.

So why are they supporting this now? Quite simply they want to create more distribution centers in different regions of the U.S. I assume there must be a hell of a good business case supporting this. Their around on the sales tax issue is like a Republican saying the country isn’t spending enough and should tax everyone twice as much to fund further spending (or like a democrat saying we should cut all income taxes).

Who Benefits from the sales tax

One of the arguments that you will hear in favor of this tax is that the current system is unfair to the local retailer. People will window shop in person and then using their smart phones, find a better deal on the internet, typically with free shipping and buy it on line without paying sales tax. Obviously this puts the local retailer at a competitive disadvantage. This should help level the playing field to some extent and give the local business a fighting chance to compete on price and service.

The State will definitely benefit. You can make the argument that most states have a mechanism to recover that sales tax through their income tax filing system. The reality is tht they are unenforceable and in all likelihood nobody admits to buting anything online and addiing to their income tax bill at the end of the year. Do you? (that’s a rhetorical question, you don’t have to answer it).

One interesting but overlooked perspective is that the small online retailer may actually have a competitive advantage from this new law. They won’t have to collect a sales tax making them an attractive alternative to the larger retailers. This is a complete turnaround from the argument that it will hurt them but it’s a reality if the law goes into effect as it’s currently written. The small “craft” or “boutique” Internet retailers may actually get a boost from this.

Another group that might benefit from this are web sites and bloggers that live in states that are “blacked-listed” by Amazon. North Carolina is one example that I am personally aware of that fits this description. If the new sales tax collection laws go into effect, Amazon would no longer have a reason to blacklist certain state residents and entities from becoming marketing affiliates.

New Opportunities

There’s a potential to create a new service based market if this law goes into effect. The mid sized businesses (those that gross over one million dollars in revenue) may not have enough resources to properly administer collection and distribution of sales taxes. They may be willing to outsource this activity to a third party. A third party that is focused on this activity could potentially make a decent living out of doing this if they have a number of large clients.

There are some companies already out there that are well positioned to do this. Payment processing companies such as Paypal could add this as a service. Not only would there be incremental revenue for them but the possibility of drawing merchants to them as a sole payment source.

All in all, I don’t necessarily see this as a bad thing. The impact on medium sized online retailers is a potential problem. But if payment processors and independent service companies jump in, they won’t have to solve the problem for themselves.

Do you have an opinion on the new online sales tax that may be made into law soon?

 

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John Schmoll is a Dad, husband and veteran of the financial services industry. He's passionate about helping people learn from his mistakes so that they can live lives free from the shackles of debt and empowered to make their money work for them. You can check out his other sites: Frugal Rules, for ways to improve your financial literacy; and Sprout Wealth for tips on different ways to make more money. John has been featured on Forbes, Lifehacker, Yahoo Finance and US News & World Report.

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21 comments

  1. I think this is a good potential law, but they should and I think they do require states to streamline the tax submission process. If that happens, it will be easy to deal with. If this happened when I was running my electronics business, it would have been a pain.

    I collected sales tax in multiple states and it was a nightmare. My business had revenues in excess of 1 million, but my margins were thin, and I wouldn’t be able to afford hiring someone to deal with it.

    The only thing I am looking forward to is getting back in as an amazon affiliate.
    Grayson @ Debt Roundup recently posted…The Weekly Debt Roundup Digest – 5/5/2013My Profile

    • I agree with you on the states streamlining this process. It’s also why I think there is a potential for a service business to retailers that are large enough to be impacted, but with not enough margin to afford the added expense of dealing with the sales tax issue. Hopefully they will raise that to 10 million. I hear you on the Amazon affiliate program!

  2. It does make sense that you pay the taxes from the state of the person who sells you something, since you could travel to that state and buy it there, then get back home without paying taxes. Paying local taxes on an internet item, not so much.
    Pauline recently posted…Help me help a reader get on track with her financesMy Profile

    • IT was bound to happen sooner or later. I’m not against it though, especially if it help keep the state from looking to raise taxes in other areas :)

  3. I’m OK with it as long as it only hits online retailers that have large revenues. As you pointed out, the logistics of collecting and paying state sales tax for all of your customers is cumbersome.

    I don’t think it will deter that many from buying online however. Prices still remain lower than products in brick and mortar stores. I live in a state where Amazon has a physical location and therefore began paying sales tax late last year. It hasn’t stopped me once from buying online versus going into a physical store to make a purchase.
    Jon @ MoneySmartGuides recently posted…The Round Table – May 4, 2013My Profile

    • I’m with you, It probably won’t keep me from making online purchases, I’m all about the convenience. Amazon is ridiculously convenient, it usually takes me a fe minutes to find what I need at a good price and it’s usually in my mailbox in a few days!

  4. The internet sales tax thing was bound to happen at some point, but I agree with you it will defiantly help out the smaller business since they won’t have to deal with the sale tax issues until they hit a million, but one other side effect I see happening with this as well is if companies are close to hitting the million mark they may hold back so they don’t have to implement this. Which in turn may stifle the growth of some of these companies.

    • I really hope that they raise that number to 10 million. I think 1 million is to low and will hurt up and coming businesses. Lets see what happens, we should know something within the next week or two!

  5. I think it’s inevitable that we’ll end up paying tax some day on internet purchases. Sure, it sucks to lose the benefit of getting stuff tax free…but I’ll still pay it if it means I can avoid going to the mall. ;)
    John S @ Frugal Rules recently posted…5 Things I Wish I Knew Before I Graduated From CollegeMy Profile

  6. I’m not surprised at all. If it means less taxes elsewhere and allows the states to support schools and other projects without raising taxes in other ways, I don’t have a problem with it. It would be a real pain for small retailers, but I’m sure there will be services available to help sort it out. It’s always the small businesses who get hit the hardest.
    Kim@Eyesonthedollar recently posted…How We Lost $6000 in Student Loan ForgivenessMy Profile

  7. Not too surprised that this frontier is being crossed. Where there is opportunity to collect revenue, people will be there to get it. I don’t think it will change my shopping habits too much, but it’s interesting how this might have an impact on some businesses. Also, good point on how it could start demand for other businesses – that’s often what regulation or taxes do!
    Tie the Money Knot recently posted…Making Small Talk ValuableMy Profile

    • I know it won’t change my shopping habits. I really don’t mind paying it, as long as it keeps them from raising some other taxes!

  8. Jose, its not a bad idea, I hate to see what the Govt will do with the windfall of tax revenue. I am sure they will not do the prudent thing which is pay down debt, they will instead, expand the nanny state. This is what is worry-some to me!
    Jim recently posted…An Interview With Dr. Josh Umbehr, Real Life Medical Concierge Service ProviderMy Profile

    • Hopefully they’ll backfill the deficits they have and not create new spending, which they are inclined to do. We’ll see…..

  9. Great post. Jose with lots of valid points. I think people who are against the law often times think only in terms of how much more money they’ll be forced to spend, but when you look at the broader picture, you can definitely see the benefits. And like some others said, it’s often still cheaper to buy online, and definitely more convenient.
    Laurie @thefrugalfarmer recently posted…You’re Not Just Paying off Debt, You’re Building WealthMy Profile

    • I think you are right Laurie, the people that are against it are thinking with their wallet and not looking at the broader picture. To be honest, I buy online for the convenience. Either because I don’t want to drive a gazzilion miles to find something or because it’s only available online. Saving on sales tax is not really a driver for me.

  10. I hadn’t thought about how it affected the retailer. Thanks. Hopefully the mid-level online businesses will be able to cope. They say most people who order online won’t be bothered by the tax because they just want the item delivered to save them the time of shopping in brick and mortar stores.
    Maggie@SquarePennies recently posted…A Luxurious Copper Floor for Pennies and 6 Other Penny Decor ProjectsMy Profile

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