Whether you call it a recession or depression, the only way to cope is to cut expenses and eke out more revenue. That applies not only to individuals but also to state governments. Like many of us, states are strapped for cash and struggling with the faltering economy. So who could blame them for being very interested in the research that projects just how much states could gain in revenue if they collected sales taxes on Internet purchases. What does it mean for you, the online businessperson? Chances are that soon you'll have to collect sales taxes from the majority of your customers, not just those in the state where your business has a physical presence.
The movement is already underway. Recently, the state of New York enacted a law that requires big online retailers like Amazon.com to collect sales taxes if they compensate affiliates and publishers located in the state, even if the marketplaces themselves have no presence there. California and other states are considering enacting similar legislation.
In the next few weeks, a bill called the Main Street Fairness Act will be introduced in Congress, according to Neal Osten, Senior Policy Analyst with the National Council of State Legislators, which is helping to draft the bill. Senator Mike Enzi (R-Wyo.) and Representative Bill Delahunt (D-Mass.) are expected to sponsor the bill, which is intended to overturn Quill vs. North Dakota, a 1992 Supreme Court case that concluded states can only require retailers to collect state taxes in territories where they have offices or stores.
The legislation, if enacted, would require all sellers (except small businesses that qualify for an exemption) to collect sales tax on purchases made by residents of certain states. Those are the 23 states that have complied with the Streamlined Sales and Use Tax Agreement. The agreement currently calls for voluntarily sales tax collection; the Fairness Act would mandate it.
The challenge, ecommerce observers and sellers say, is that the act would require businesses to conform to thousands of sales tax laws, which vary widely from one city, one county, and one state to another.
"It will be a problem," says Barbara Weltman, author of J.K. Lasser's Small Business Taxes. "The reason it is so troubling has to do with the fact that there are 8500 local sales tax jurisdictions in this country. It's difficult for companies to comply with all the rules."
For Leigh Bader, CEO of 3balls.com, the issue isn't so clear. His company has a brick-and-mortar store in Massachusetts and is also one of the largest sellers on eBay. "I can see both sides of the argument," he says. "People wanted to make the Internet available to the widest possible number of consumers, so they said no to sales taxes. But that gives the brick-and-mortar store a disadvantage. I understand the states' desire to collect sales taxes on items they think they're due. But this bill would force 3balls.com to be acquainted with the tax laws in many jurisdictions. It's practically unfeasible."
According to Weltman, services like Avalara.com would see a rise in business if the bill becomes law. Avalara, she says, is one of a handful of approved sales tax processors who will calculate online sales taxes for ecommerce sellers.
"In addition to the challenges in keeping current on the rates and whether an item is exempt or not, it is also critical to stay current on how states determine which local jurisdictions can impose taxes on transactions that cross borders," says Carla Yrjanson, CPA, who is Vice President of Tax Services for Sabrix, a provider of tax management solutions. "We have a team of tax professionals tracking these changes on a daily basis. I can't imagine how a small or mid-size business could effectively track these changes themselves without using a service such as the Sabrix Managed Tax Service."
Osten said the new legislation requires that the Streamlined Sales Tax Governing Board establish a small-business exception. "The Governing Board has established a Task Force to make recommendations on a small-business exception," he said. "However, the Task Force has yet to finalize a recommendation. The Task Force also will set the level of compensation for sellers that is required under the Agreement and the federal legislation."
As Bader points out, previous attempts to enact sales tax legislation have been proposed and failed. And Weltman is unwilling to predict this bill's fate. "Who knows?" she said when asked about this bill's chances of passing. "This is only the opening salvo."
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Greg Holden, who lives in Chicago, is the author of several books about eBay, including "How to Do Everything with Your eBay Business," second edition, and "Secrets of the eBay Millionaires," both published by Osborne-McGraw Hill. Find out more on Greg's website, which includes a blog related to his book "Internet Babylon: Secrets, Scandals and Shocks on the Information Superhighway," published by Apress.
