Time to Tax Online Sales

Sep 30, 2005

Commentary by Bill Bittner, President, BWH Consulting

According to a report in The Wall Street Journal, 18 states have joined together in an effort to remove the basis for the 1992 Supreme Court decision to not require online
retailer to collect sales taxes.

The Supreme Court ruled for the exemption because it recognized the hardship it would be placing on retailers trying to keep track of all the various sales tax laws. These 18
states have agreed to harmonize their sales taxes so that it is no longer such a challenge for retailers to comply. The hope is that, by making compliance easier, the states will
begin to receive this additional revenue.

It is a brief introduction, but there are a lot of angles to this story. The first is whether the Supreme Court rationale even applies in 2005 with current Internet capabilities.
One of the consumer’s rationales for paying shipping charges on online purchases has been the sales tax savings. Will required tax collections combined with increased shipping
costs due to fuel prices have an impact on online sales?

The progress of Service Oriented Architecture (SOA) for the support of shared services over the Internet has made it extremely easy for companies to have access to each other’s
data files. There is no reason why a central database of tax status based on UPC (GTIN) and political jurisdiction could not be accessible to all online retailers.

The consumer perspective is more interesting. The addition of sales taxes and increased delivery costs could have an affect on the consumer’s decision to buy online. Combine
this with need to accept remote support verses the services of their local retailer and it opens up a chink in the online armor for brick and mortar operators to exploit.

Moderator’s Comment: Is the Supreme Court’s rationale for allowing online sales to go untaxed still valid with the advances made in online technology
since 1992? Will required tax collections combined with increased shipping costs due to fuel prices have an impact on online sales?

Bill Bittner – Moderator

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6 Comments on "Time to Tax Online Sales"

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Mark Lilien
16 years 7 months ago

Increased shipping costs won’t have an impact on Internet sales because the usual alternatives also entail increased fuel costs. If you drive to a store and pay an extra $1 for gas, there’s no savings versus paying an extra $1 for a shipping charge using the Internet. The Supreme Court decision, if it was truly based on the difficulty of keeping track of sales tax variations, made no sense. Computerized sales tax services were available when the decision was made. If sales taxes are collected on the Internet, it will definitely hurt the higher price point businesses (4-figure TV’s and computer systems, for example) the most. It will also create an incentive to shop from foreign-based sites, particularly in Canada and Mexico, until (unless) those get taxed too. There are several appealing things about on-line shopping (convenience, fact-finding, choice) that will continue, regardless, but it’s likely that the growth rate will slow down.

Herb Sorensen, Ph.D.
16 years 7 months ago
The larger issue here is the way society is organized. Physical location has obviously been the means of organizing society into governmental units since the beginning of time. Freedman’s “Flat Earth” hypothesis would suggest that, over time, geographic boundaries will become less significant. (The recent Atlantic Monthly has a feature on “spikiness” of society that largely debunks Freedman, as well as did a Wall Street Journal Opinion Page piece a couple of months ago. The 80/20 rule also argues against it.) Even with the caveats, we see continuing erosion worldwide of traditional geopolitical boundaries. All such developments attack, at the foundation, the concept of a geographic governmental unit taxing within its boundaries. As a national/international business, we fight nexus regularly. That is, we do not want to have any governmental connection between our business and every piece of real estate that we fly over or visit. This is a HUGE issue with social and political ramifications far beyond the taxing of internet sales. The ultimate question is, if governments do not have geographic authority, then… Read more »
Craig Sundstrom
16 years 7 months ago

Perhaps I’m a minority of one here – or at least in the 17% minority – but I’ve never understood what the distinction is (tax-wise) between online and “good old fashioned” mail order sales: the rule always was that if you had a physical presence in a state you’re liable for the tax, if not, you aren’t.

Unless that fundamental holding is reversed, I think the internet tax issue is a red-herring.

Ed Dennis
Ed Dennis
16 years 7 months ago

Why are the States making a fuss? Aren’t they representing the best interest of their residents? Don’t they want people to have more disposable income to spend inside the State? Don’t States tax the income of businesses and people who make a living on the Internet? Don’t the States realize that if they require the collection of sales tax on Internet sales in their States that business will move OUT to a State that allows tax free sales? If our country, USA, decides to tax Internet sales then sellers will move to Canada or Mexico or Bermuda. The fact is that all this noise is about politicians posturing for the media. They want to make a lot of noise for the locals who think they are getting hurt and be seen as some sort of savior. I’m sorry but we all know this is fake and it’s a waste of time when time needs to be spent finding solution to REAL problems.

Al McClain
Al McClain
16 years 7 months ago

The answer to why states want to impose an additional tax is because that’s what they do. Governments – local, state, and federal – raise revenue by raising taxes. When they fall short, rather than try to get more efficient, they prefer to raise taxes. Does anyone think we’re getting full value for our taxes at any level? It would be great to see a politician emerge who could change that, but I don’t have my hopes up.

Side note: shipping charges and extra fees have to be holding back Internet sales to some degree. For example, I bought two $46 tickets today from ticketmaster.com and was charged an additional $11 “convenience charge,” a $3 “order processing charge,” and a $1.75 fee for printing the tickets on my own printer. Not enough to make one go to the stadium to get the tickets, but enough to make one buy future tickets at the box office when you’re already there.

Mark Burr
16 years 7 months ago

The answer is neither shipping costs nor taxes will out weigh the convenience factor for those using Internet vs.. bricks and mortar. Whether sales tax should be charged or not is another question. Personally, I believe taxation should be limited to the State in that the product sale originated. That means if the sale originated in NY then the sales tax should be the NY rate. There would be no differentiation between being physically present at the time of the sale.


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