Why Amazon and other retailers are supporting this national sales tax legislation

Flickr photo via DonkeyHotey

Bipartisanship is a rare beast in Washington D.C.  these days, especially when it comes to new taxes. So when 35 house members and 18 senators introduce new tax legislation, it’s worth taking notice.

Dubbed the Marketplace Fairness Act, the bill seeks to essentially create a nationwide sales tax for online retailers. The goal being to even the playing field for traditional retailers whose business model is either not compatible with ecommerce, or whose majority of sales are not from online but from their storefront.

The effort, in the Senate, is spearheaded by Senator Mike Enzi (R-WY), Assistant Senate Majority Leader Dick Durbin (D-IL), and Senator Lamar Alexander (R-TN). It is Durbin who has the best soundbite on the legislation, “All they (businesses) want is a level playing field. By giving states the authority to enforce existing tax laws, the Marketplace Fairness Act of 2013 eliminates the competitive advantage currently enjoyed by many Internet retailers at the expense of local businesses. Every day we don’t act to pass this bill, we risk another small business closing its doors because they can no longer survive.”

Senator Durbin knows this is issue is hardly new. Since the Supreme Court’s 1992 ruling, Quill Corp. v. Heitkamp, where the court found that states had a right under the Due Process Clause of the Constitution to collect sales taxes, but the burden placed on out-of-state businesses violated the Commerce Clause; online retailers have been citing the Quill decision as their reason for not charging or collecting sales tax in states where they do not have a physical presence.

Congress in their usual timely manner is finally getting around to addressing the loophole. This however is not the Marketplace Fairness Act’s first appearance in Congress. It was introduced by Senator Alexander, and Representatives Steve Womack (R-AR) and Jackie Speier (D-CA) during the 112th Congress, and didn’t see the light of day due to negotiations over the fiscal cliff.

Dick Durbin

Should the bill finally pass, it could potentially be a major windfall for most states who are losing an estimated $23 billion in tax revenue every year, according to The National Conference of State Legislatures, because of their inability to tax online purchases.

According to The Hill, BestBuy.com e-commerce president Scott Durchslag stated the bill was the company’s top priority: “We need a level playing field to compete on.” Considering that Best Buy is struggling to survive, their support of the bill is hardly a surprise. One wonders if the chain will flounder and sink anyways.

The bill has made strange bedfellows though, seeing the rare combination of support from big box retailers like Best Buy and Wal-Mart team with e-commerce giants like Overstock and Amazon.

Amazon, perhaps, has the most to gain, since it has been singled out for a series of poorly thought out tax laws nicknamed the Amazon Tax. Passed in a handful of states, including New York where the suit against their version of the Amazon Tax reached the New York Court of Appeals last week. The legal and legislative battles over the Amazon Tax have been a thorn in Amazon’s side for several years.

They have also hurt 76,000 affiliates, online sites that make a living commission based advertising, whose businesses have been cut off by e-tailers attempting to dodge the legislative bullet meant for Amazon. Senator Durbin was even named Affiliate Industry Advocate of the Year by Affiliate Summit (disclosure, I serve on Affiliate Summit’s board of advisors).

In fact, Amazon loves the bill, which would render the current Amazon Tax Laws in various states toothless, so much that VP of Global Policy Paul Misner even wrote a thank you letter to Congress saying:

“Amazon.com has long supported a simplified nationwide approach that is evenhandedly applied and applicable to all but the smallest volume sellers. With this in mind, I am writing to thank you for your bill, which will allow states with simplified rules to require sales tax collection by out-of-state sellers who choose to make sales to in-state buyers.”

Considering the great lengths Amazon has gone to in the past to avoid paying sales tax, I find it all rather ironic.

While there is no doubt that the Marketplace Fairness Act is a step in the right direction, the question is whether or not it is good legislation. Enabling states to collect the sales tax is not the same as creating a sales tax that is fair and viable. Currently there are over 10,000 taxing jurisdictions in the U.S., all with separate rates and rules, that small ecommerce companies would be forced to comply with.

Americans for Tax Reform President Grover Norquist published a statement warning that the legislation would be a nightmare to enforce, stating: “At the end of the year if there are any disputes over sales tax collection, the Virginia business would be subject to the New York Department of Revenue and New York Courts.”

Norquist goes on to predict that:

“Currently, states can only tax those consumers who reside within their borders. This “physical presence standard” ensures that the businesses taxed by states have the ability to express their approval or displeasure with state tax code through elections, referendums, etc. This legislation encourages states to collect taxes across their borders from businesses with no recourse. Thus states will compete for revenue by increasing cross-border taxes, rather than lowering taxes. An incentive to raise taxes can never prove beneficial.”

Several online tradegroups including the Direct Marketers Association, and the Computer and Communications Industry Association have also come out against the bill under the belief that it will stifle growth.

As Steve DelBianco, executive director of e-commerce trade group NetChoice told ComputerWorld: “Failing to require that states simplify their tax systems before enacting these new taxes is putting the cart before the horse.”

Now that’s something Congress is good at.

Startups and small online retailers would be faced with managing compliance over multiple jurisdictions where as small retailers would only have to comply to taxes in the jursdicition where they are located. The question is would the new inbalance created be unmanagible and stifle growth?

The current bill does contain an exemption for small businesses with less than $1 million in sales. And while I have my concerns about the legal nightmares the bill may cause in terms enforcement, there are enough robust and relatively inexpensive tax tools out there that etailers can plug into their shopping cart systems that will keep them in compliance.

It may cost extra, but playing fields don’t get leveled unless someone pays.

Angel Djambazov is a GeekWire contributor. He is the former editor-in-chief of ReveNews and the owner of Custom Tailored Marketing.

  • http://www.facebook.com/brookschaaf Brook Schaaf

    Nice write up, Angel, though I think the tax tools will end up being a significant cost for retailers. Sadly, assuming it passes, the total compliance burden for online retailers (and therefore consumers) will likely be even higher, even if it is the appropriate path to go down.

    • http://www.revenews.com Angel Djambazov

      Thank you for the compliment Brook. Companies like Avalara will make a killing selling tax solutions. Hopefully more competition will bring the price down, but I completely agree that I don’t see the compliance burden lessening under this bill.

      • http://www.facebook.com/wadetonkin Wade M. Tonkin

        Yeah, the software and consulting companies specializing in the collection and remittance of sales taxes are definitely going to experience some kind of windfall here.

  • BrandVerity

    The law certainly isn’t perfect, Angel. But it’s potentially a better alternative to the often-cryptic nexus tax in its various forms, which has resulted in the ousting of so many affiliates as you mentioned.

    Interestingly enough, from what we’ve learned, the response to cut all affiliates from a nexus state may not actually be a necessary one. But either way, these taxes still create challenges for merchants.

    Ideally, in the future the code will be simplified and its fairness will be improved such that it won’t overly burden young technology companies. After all, the buyer benefits from a healthy industry with plenty of competition.

    • http://www.revenews.com Angel Djambazov

      Oh, it’s 100% better than any version of the nexus tax I’ve seen.

      Merchants are risk adverse. No surprise they cut and run from affiliate relationships in any state where they get a whiff of possible nexus issues. Even if it is bad business to do so.

      It’s why I mentioned in a previous article on Geekwire (http://www.geekwire.com/2011/guide-amazon-losing-tax-battle/) that if I were Barnes & Noble I would be working to snatch up all of the affiliates Amazon was discarding.

      • BrandVerity

        One agency we know would definitely say that there’s opportunity where others make such policies.

    • http://twitter.com/fijiaaron Aaron Evans

      Gimme your money or I break both your legs.
      No.
      Gimme half your money or I break one of your legs.
      That sounds reasonable.

      • BrandVerity

        As we said, it probably isn’t ideal. Not for any party involved.

        And most likely, it will never be ideal for every single party involved. Different groups have different interests. But hopefully this can lead to a solution that’s better overall.

  • http://twitter.com/Vroo Vroo (Bruce Leban)

    Grover says “(1) Currently, states can only tax those consumers who reside within their borders. (2) This “physical presence standard” ensures that the businesses taxed by states have the ability to express their approval or displeasure with state tax code through elections, referendums, etc. (3) This legislation encourages states to collect taxes across their borders from businesses with no recourse. Thus states will compete for revenue by increasing cross-border taxes, rather than lowering taxes. (4) An incentive to raise taxes can never prove beneficial.” [numbers added]

    He’s wrong on so many points:

    (1) The taxes at question are for consumers residing within the states.

    (2) The businesses are collecting the tax from consumers, not paying the taxes themselves. The voters who pay the tax have the ability to vote in elections, etc.

    (3) OK, he’s half right on this one. In order for this to not be an unfair burden on small businesses, there can’t be surprises on what the tax is. Businesses need a simple way to know both what is taxable and what the tax rate is so they don’t get hit by penalties for not collecting properly. One solution would be to require states to provide web services that provide tax information in order to collect the tax. This is already being done. See taxcloud.net and streamlinedsalestax.org.

    (4) It’s not raising taxes. It’s collecting taxes from tax cheats – people that order online and don’t pay the tax that they are legally obligated to pay. The loaded language of saying it’s raising taxes or calling it a new tax is just propaganda.

    • http://www.revenews.com Angel Djambazov

      The Mainstreet Fairness Act is indeed focused on the consumer and that in theory it should work the way sales tax works when you are at the cash register. But unlike in state retailers, online companies who will act as the collectors of the tax carry all the liability of its enforcement without the benefit of recourse. As the ones who have the responsibility of actually paying the tax after they collect it from consumers on behalf of the states, they are on the hook if it was improperly collected and they face liability if they not in compliance (Norquist states that in his argument).

      Amazon has both the legal resources to stay in compliance and the ability to defend themselves should they encounter liability PLUS it has the ability to create a physical footprint in a state should they need political leverage. Small companies won’t have those resources or that luxury. Also Amazon, to stay price competitive, could choose to pay a portion of the tax themselves rather than pass the cost to the consumer (something Norquist clearly states). Many large companies could choose that tactic. Again small ones won’t have that luxury.

      Your point #4 is well taken. It is not raising taxes. Those who call it a “new” tax or accuse the backer of the MFA as “raising” taxes are just spinning it.

      • Susan Lindsey

        Angel, you are correct that the MFA requires the smaller online sellers to become tax collectors who remit USE TAX (not sales tax) all over the country. That’s a huge, immensely complicated job way not only way over the heads of most businesses, but disadvantages online sellers who must also take pictures, list, pack, insure, and delivery EVERYTHING that’s sold, a process that caps HOW MUCH can be sold in a way that doesn’t happen when items are sold in a retail store.

        The MFA would target “remote sellers” to collect and remit a use tax law that was created in 1920s and is so problematic, it’s never worked well, mostly becuase states have neglected it. Requiring people to pay a tax that’s mostly not been paid for 80 years is a TAX INCREASE that will hurt both consumers and smaller businesses. There are other solutions that are more cost efficient and effective. Let’s all work together to explore those rather than passing a law that will geatly harm small business America, thwart freedom on the Internet, and mostly become a tax that supports big business growth, all at the tax payer’s expense!

  • Peter H

    There are real costs here for online retailers.
    First, you have to integrate with web services to calcualte tax rates for any address. Second, you have to track what is and isn’t taxable. Third, you have to manage people who send you Resale Certificates to not pay sales tax – and verify every form that is sent. Fourth, you have to file sales tax remittance forms for 50 states. Fifth, you have to mail out 50 checks to 50 states on their schedule.
    Every single online retailer will have to undertake these steps. This will put some of them out of business. For others, it will increase costs in ways that increase your prices.
    We can’t hand wave away the costs to online retailers. They are significant and ongoing.