Three Laws, Two eCommerce Outcomes: Death and Taxes

cautiontaxesRecent legislation that passed the House is poised for a vote in the Senate, should they get around to it anytime soon. While this legislation’s intent is to level the sales tax playing field between eCommerce retailers and online retailers, it will likely do more harm than good in the long run.

  • Internet Tax Freedom Act (ITFA): Placed a moratorium on internet access taxes that expires on November 1, 2014. A few states that were charging taxes prior to the moratorium being enacted were grandfathered and allowed to continue collecting access taxes. The house also passed The Permanent Internet Tax Freedom Act (PITFA) last week that permanently bans taxing internet access.
  • Marketplace Fairness Act (MFA): Would allow states to collect sales taxes from online retailers regardless of whether they have a physical location (or nexus) in the state.
  • Marketplace and Internet Tax Fairness Act (MITFA):  Essentially a combination of the above two laws, MITFA would extend the moratorium on internet access taxes for 10 years and ban grandfathered states from collecting access taxes all while allowing states to collect sales tax from online retailers without a nexus in the state.

So we’re up for a little banter between the House and Senate over taxation of access and eCommerce sales and I’m not surprised to see them combined as a way to get a little leverage on moving things ahead. As usual, when legislation like this is enacted, some of the longer term effects aren’t necessarily considered. While many brick-and-mortar retailers may rejoice that the sales tax playing field is leveled, I think we could see detrimental outcomes in the mid to long-term:

  • Taxes will hurt the consumer more than the online retailer: Large online retailers who have already achieved operational economies of scale will continue to do well. When Amazon began charging sales tax where I live, it didn’t make a difference to me or others that I know. It was still more convenient to buy online and Amazon had more product variety than any nearby brick-and-mortar location. A lot folk buy online to save time — not just to do an end-around on sales taxes. And if the moratorium on access taxes isn’t continued, it essentially amounts to a tax on convenience and efficiency and further penalizes the consumer. I think the latter will be passed and most likely in MIFTA that will link it to the collection of sales taxes.
  • Threat of Death for Small Online Retailers: The current revenue trigger point for companies having to collect and pay sales tax for out-of-state buyers is $1mm. If you’re a small online retailer that is just getting started, the additional tax burden — along with the effort requires to file in every state where you have a buyer — may be all it takes to make the business unprofitable or dampen the growth potential of such a retailer. Online retail significantly broadened the retail landscape for consumers but is this really any different (in theory) from mail order 30 years ago? These laws are similar to mail order legislation that was being debated throughout the 70’s and 80’s. Keeping taxation lower, especially across state boundaries, allows small online retailers a little breathing room to continue employing people and building a business.

What are your thoughts on this legislation and the outcomes it may produce?

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