Believe it or not, but the Battle for (or against, if you will) the Internet Sales Tax has been going on for 20 years now.
First, there were no online sales taxes at all. Back in the early 90s, members of various legislative bodies thought that the World Wide Web was something that Al Gore invented and, therefore, didn't pay much attention to it, especially the Republicans. Meanwhile, the online vendors (the term e-tailer didn't gain wide acceptance until 2000) and their customers justifiably acted like pioneers in the brave new world: as far as they were concerned, they operated in the environment with no physical attributes, and no brick-and-mortar regulations were applicable to them.
It didn't take too long, however, for the states to catch on and get all itchy on account of the missing revenues. The first most obvious targets were those conventional retailers, who quickly added shopping carts to their websites: Godiva, Staples, Best Buy, Bloomingdale's, etc. With them it was easy to enforce the guiding principle of sales taxation - the physical presence rule. They have multiple locations practically in all states – collecting and remitting sales taxes are routine tasks for them. A bit of code-writing and, voila, if your shipping address is in the state where the seller has a store, an office, or a warehouse, the tax will be applied.
I was in the avant garde of the e-commerce consumers. I bought my first book on Amazon in 1995. I recall it was a new addition of Joy of Cooking: 1150 pages – too bulky to drag it with me from B&N. A desire to own a one-of-a-kind Victorian coral bracelet sold by an antique dealer in Amsterdam trampled my inherent mistrust and led me to the conclusion of my first eBay purchase in 1996. I had to fax my credit card info to the seller – we were still two years away from the inception of PayPal. And that same year I booked a room at Montreal's Ritz Carlton through Expedia. I consider myself an Internet veteran. Today, 90% of my consumer experience is managed online. And I am not alone: in 2012 Internet sales amounted $226 billion.
And all these years, I've been kind of on the fence about this whole Internet taxation issue. On one hand, I LOVED not paying sales taxes for the items I bought from my home. Plus, no state or city resources were utilized: I didn't use any public transportation, roads, or street parking; I didn't walk into any buildings; nor did I use any City utilities. The cost of my connectivity is taxed via my cable and power providers, while delivery services collect sales taxes from the shippers. I still remember how disappointed I was when Amazon opened a distribution center in NYC to facilitate same-day deliveries and started taxing my purchases.
On the other hand, the economist in me is fully aware of the importance of sales taxes for the state and municipal budgets. And, while I strongly believe that 70% of government employees are redundant and the rest are lazy, I do want all bridges to be repaired on time. Unlike other people, I understand that it's a capital-intensive process and money has to come from somewhere. I knew only too well that Bluefly, with offices and employees in NYC, should've been taxing my purchases (they didn't) way before the CEO decided to launch a brick-and-mortar outlet.
I am a stickler for the rules that create common platforms for everyone involved: generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), international commercial terms (Incoterms), etc. Speaking the same language prevents misunderstanding. If we cannot avoid paying, collecting, and remitting sales taxes, let's at least stick to the simple rules of physical presence already in place. Even though, the interpretation of what constitutes "physical presence" in the Internet environment could be debatable. I kept pondering, for example, whether, besides the conventional criteria like leased or owned commercial property, payroll, and inventory, the location of web servers and interface workstations should be considered as well.
Yet, one thing has always been clear to me: If you don't have any type of presence in a state and don't use any of the state's resources in order to generate income, you cannot be made responsible for collecting sales taxes in that state. This is not medieval Europe, I thought: just because the governments want additional revenues, they should not just impose new tax-collecting laws like some Sheriff of Nottingham. This would destroy a lot of small businesses that were able to break out of their local boundaries and find their way into the national and even international markets through the web.
What a fool I was! Who cares about small businesses? Members of the government act according to their allegiances to a few Big Players with their big gains and losses at stake. On one side, there are Wal-Mart, Target, COSTCO, and Amazon (boy, this alliance alone was unimaginable only a few years ago), who are literally everywhere on the ground and on the web. These "poor" leviathans complain that they are at the "price disadvantage," losing customers to those e-tailers (read: smaller businesses), who don't charge sales taxes. "All" they want is to level the playing field, i.e. for everyone to collect taxes everywhere.
On the other side of the barricade is eBay providing thousands of online shops and craftsmen with the means of offering their products to the world. It stands to lose tons of fees if the members' business volumes contract. Nobody represents the unaffiliated e-tailers.
Guess who tips the scales? In the beginning of this month, the Senate approved an Internet tax proposal (perversely named Marketplace Fairness Act), which is not based on e-tailers' physical presence at all and will force shoppers to pay sales taxes on the majority of online purchases. In basic terms: all online sellers will have to collect sales taxes and file returns for all states to which they ship their merchandise.
The plight of small businesses, including the additional workload related to the new responsibilities, is almost an afterthought in the proposed legislature: the ones with less than $1 million in out-of-state sales will be exempt from sales-tax obligations. What is this stupidly irrelevant number? Are they low-balling like some cheap hagglers? Again, common ground, people! According to the Small Business Administration's definition, a retailer is considered "small" if the sales do not exceed $5 million to $21 million, depending on the product!
Why our various government bodies always have to be such opportunists and never think about the future impact of their decisions, I have no fucking clue. The e-customers have only this much disposable income: if they have to spend a portion of it on the Internet sales taxes, they will buy less goods. Consumer market contraction anyone? And in the long-run every time a small business is hurt, it affects the entire economy. But who cares about the long run? The governments are more interested in grabbing whatever they can right now, whether they entitled to it or not.
The Frustrated CFO 