As you may have heard, the Senate is working on a bill which looks like it may be passed on May 6th called the Marketplace Fairness Act of 2013.  If passed into law (it looks like the House will also approve it, but we’ll see) it would allow state governments to force Internet retailers to collect sales tax from their customers and remit the proceeds to the state and local governments where the purchaser lives. The States would have to provide free software to Internet retailers which would allow them to do the calculations, and Internet retailers with revenues under $1M would be exempt.  That’s some small relief.

There are seemingly two goals of the legislation.  The first is to fund state and local governments which are, for the most part, starved for cash and seeking any new revenue sources (ie tax moneys) they can find. Second, brick and mortar retailers claim that they are at a disadvantage because customers can come in and look at items in their stores, check the price of the item on their smart phone and then order the same item online and not have to pay any sales tax on it.

My thought is that the effect of the legislation, if passed into law, would be more economically stifling (from a nationwide perspective) than it would actually serve the goals it presumes to address.

Here’s the current setup.  Internet retailers who make sales only have to collect and remit state and local sales tax if the sale was to a resident of the state where the Internet retailer has a physical location.  Any sales made to residents of states where the Internet retailer does not have a physical presence do not require the Internet retailer to collect any sales tax, rather, the individual purchasing the item is supposed to pay the applicable state and local sales tax to their local governmental bodies (most online purchasers never do this, FYI).  So if I sell widgets online and have a physical presence only in the State of New York, then I only have to collect and remit state and local sales tax to the State of New York.  If I sell items to anyone who resides out of New York then I am under no obligation to collect and remit sales tax to any other state.

The problem with the current system is that very few people that orders things online go and pays their local government for the sales tax they owe.  And it is difficult, if not impossible, at this point for states and local governments to check and see what is being ordered over the Internet – short of violating many privacy laws. States would need information from either credit card companies, Internet retailers or delivery companies (Fedex, UPS, etc – although these companies wouldn’t have all the sales information – but they would know if someone had ordered something).  There is currently no mechanism in place for states to get online sales information.

While the law would require states to provide free software for calculating how much Internet retailers should collect this only adds to the hassle.  First, assuming all 45 states (not all states have sales/use taxes) timely come up with software packages, every Internet retailer needs to integrate all 45  state’s code into their billing software (this will create a new niche of firms that will do this for Internet retailers, or a new stream of fees for sites like godaddy.com).  The assumption that all 45 states will timely come out with software packages that are bug free is, however, an incorrect assumption.  It won’t happen, some states will be late and others that do have it will roll it out with bugs.  I won’t mention any states by name, but dealing with some just doesn’t inspire any confidence.

Next, because each state has multiple levels of sales tax – in New York we have a state sales tax and then every single county has its own percentage that is tagged on (so a purchase in one county may be taxed at 8% and another taxed at 7%, etc.) – remitting these payments will be a nightmare for Internet retailers.  Dealing with  only a few taxing jurisdictions is itself not an easy tax, but dealing with rural counties in Montana and Alabama just is not going to be easy if they believe their are discrepancies.  Some states may require remittance to the State directly, and the state will then divy out the funds between the counties but it will be on a case by case basis.  Anyone that’s dealt with a state on sales tax issues knows that it is a complex issue.  Unless there is some change it could be a logistical nightmare.

To the argument that brick and mortar retailers need this legislation – if you own a store and are only offering things that are readily available online, then you need to re-evaluate your business plan. I am all for buying local and do so whenever I can.  Most of the time I like to do it for items that are unique to the area, but I also buy regular items that I could otherwise get online.  To get people into the store you should have something special – an atmosphere, some other unique goods, etc. And if you can’t compete on price for an item with an Internet retailer (especially considering that shipping and handling fees are usually charged), then you need to find some new items to sell.  Smartphones have made it easy to find out how much other companies are charging for an item.  Maybe look into some more unique items or less elastic goods.

While the above felt like (and may have come off as) a rant, I didn’t intend it as a political post as I don’t want to wade into the tax v. anti-tax debate.  The sales tax is already due, its just about who has to remit it at this point.  The last thing the government needs to do is make it harder to do business.   This sales tax bill if passed into law will make it more difficult.

Some changes to the bill that may help are to have the federal government create and provide the free software to the Internet retailers, or even better to just simply enforce the current scheme, but require Internet retailers to inform each state where a purchase took place, and the amount (without describing what good was purchased).   Then let the state check that against the individual state resident’s tax return.