Online sales tax still tops the agenda for major retailers

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Jonathan Johnson, president, Overstock.com
Jonathan Johnson, president, Overstock.com

The controversy surrounding the collection of online sales tax isn't new, but the renewed fervor buzzing around it is. Though eBay, Amazon and Overstock representatives all told Direct Marketing News that the likelihood a federal bill will pass before the upcoming national election is slim — “some view it as a new tax even though it isn't,” says Overstock.com president Jonathan Johnson — well-funded advocacy groups made up of pure play Internet retailers such as the Internet Alliance and NetChoice are pushing hard for a resolution.

“There is more energy behind doing something now more than ever,” says Brian Bieron, senior director of federal government relations at eBay. “People are being paid to make this an issue.”

Laws have already been enacted in California, New York, Illinois, Connecticut, North Carolina, Arkansas and Rhode Island and legislation is being proposed in Florida, Kansas, Indiana, Michigan and other states. Scott Stanzel, Amazon's head of corporate communications says the exact number of states considering this type of legislation is “a moving target,” which is why the company wants Congress to act as quickly as possible “to provide businesses with predictability and consistency.”

Part of the confusion also lies in the variety of tax jurisdictions across the U.S. — more than 10,000 — and the vying stances held by the major e-commerce presences.

While Overstock and Amazon advocate what Stanzel calls a “fair national approach,” eBay's priority is to protect small businesses, says Bieron, who quips that “if you equalize in the name of, quote, fairness, you actually penalize the small guy.”

There is consistency, however, in how state legislation impacts the third-party affiliates that have a clear physical nexus in the states where the e-commerce sites do business. Both Amazon and Overstock say they terminated their affiliate relationships in the states where the laws were passed.

Though some might question whether this practice results in lost sales for the e-commerce sites, Johnson says the answer is no. Generally, if an affiliate is large enough, it simply up and moves across the border to a more business-friendly state. For example, Overstock affiliate CouponCabin moved to Indiana from Illinois when the latter enacted an online sales tax collection law, while FatWallet, another affiliate previously based in Illinois, set up shop in Wisconsin when Overstock terminated its affiliate relationship upon passage of the Illinois law.

“Who this really hurts is the smaller affiliate bloggers, the mommy bloggers, who are trying to monetize their sites,” Johnson says. “They can't move because they have roots, which means they lose, Overstock loses and finally, the states also lose because when we terminate it's actually decreasing state revenue.”

Johnson says that if he were a state legislator he'd be looking at what happened in Illinois and, instead of effectively driving affiliates away, he'd be actively trying to draw them in.

“Affiliate businesses are high-tech, green and bring relatively high-paying jobs to the state,” Johnson notes.

That said, it's difficult to blame the cash-strapped states which, while “duped” as Johnson puts it, by large brick-and-click operations like Wal-Mart and Target, still must endeavor to close their tax gaps.

However Overstock's Johnson isn't buying that line of reasoning. Though he says each enacted piece of legislation includes an attached fiscal note predicting that the law is expected to increase tax revenue “by some huge number … never once has that been the case.”

Despite what Johnson says is a clearly losing proposition, state legislators continue to push for online sales tax collection laws at the seeming behest of Wal-Mart, Target and other big box retailers, which, “unlike true Internet retailers, do have real physical nexus.”

“But they go to the state legislators saying it's not fair that the Internet retailers are putting the ‘Main Street' businesses out of business, which is highly ironic considering that for decades Wal-Mart has been doing just that,” Johnson says. “It's hypocrisy at its finest.”

States, however, continue to suffer serious financial crises. Citing a 2008 study from the University of Tennessee on compliance rates, use and sales tax expert Diane Yetter notes that the estimated projected tax loss from e-commerce alone is roughly $50 billion or more.

“That kind of money would certainly solve a lot of budget crises,” Yetter says. “Retailers need to start gearing up for the day in the not too far future when they will probably have to collect online sales tax.”

The issue of separate state-centric legislation versus a federal solution aside, Yetter says the problem is compounded by antiquated laws that don't take into account the complexity of the shifting digital landscape.

“If you buy a book or a computer, it's relatively easy to figure out what the tax is, but then when you get into downloading things and you don't know where items are being ‘shipped' to, it adds another layer,” Yetter says. “The law hasn't caught up with the changing technology.”

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