The Coming Internet Sales Tax

There’s been an issue brewing for the last 10 years which should reach a crescendo in another 2-3 years. One of the many advantages to internet based retail for consumers has been the lack of sales tax. What seems so common place everywhere, actually makes a pretty big difference over time, and especially for price conscious consumers.

It’s a nifty game that isn’t taught in math class but impacts everyone in large fashion. Taxes are deducted from income, and then taxes are imposed on how that income is spent in a wonderful cycle of wallet vacuuming. For example, a person could receive a one time amount of income, and then use that income to buy and sell similarly priced goods over and over, and eventually that person would be left with nothing. The reason is because money is taxed both coming and going, so over many transactions, the taxes paid would eventually leave only a penny left (and only because a penny is the smallest monetary unit). Thus is the burden of living outside a barter system and funding an army, police force, national park system, traffic lights, schools, etc.

I won’t go into into a political discussion, however it’s important to know that state governments are well aware that the billions of dollars which moved online have not been pitching in like brick and mortar stores do. The reason is that companies have shipped goods across state borders, where sales tax has traditionally been walled in. With the internet, most companies only have a physical presence in the state they are selling from, so there is no sales tax involved on the majority of transactions. With government budgets struggling under the burden of a depressed economy, the fight has been heating up to get at that money.

Some states have been aggressive in pursuing those funds, such as North Carolina and New York. These states were early adopters of a tax nexus where anyone providing any help in selling products would qualify a company to collect state sales taxes. So, if an affiliate helps to sell Amazon products for an example, and that affiliate lives in New York, then New York says it can collect sales taxes. Therefore, the person marketing qualifies for a physical presence, so no physical storefront or inventory center required. Amazon has shut out affiliates living in New York, North Carolina, Illinois, Texas and a number of  other states pressing this matter.  In the case of Texas, they totaled up Amazon sales and decided to send a $269M bill to Amazon to in October 2010 for backed sales taxes. I thought my electric bill sometimes is a surprise, but this gives me me pause.

The fight has been moving up to the federal level, which is consolidating into the Streamlined Sales Tax Project. Currently 24 states are members of a movement to push a federal tax for online sales. A federal or country wide tax does make the most sense, since a retailer would otherwise would be caught in an accounting black hole of overlapping layers of state sales tax rules and regulations. Also, in fairness this online advantage has put brick and mortar stores at a  distinct disadvantage. This has been acutely felt by companies like Best Buy, which can give up hundreds of dollars to Amazon on big ticket items. So, a consumer is more likely to a shop online at Amazon where the price is likely already cheaper because of low overhead costs which Amazon has built by not having to maintain physical stores.

This issue, along with many other matters deserves to be tracked because the internet is moving outside of a it’s childhood years. Online business is entering a new stage of maturity, evidenced by big companies settling in, and increasing consumer comfort with the innovations brought by the last 10-15 years. Just like the technology surges of the early 1900s brought cars, planes, Ford, GM, roads, traffic lights, and speed limits, now the internet has brought a massive influx of new technology which society has digested. The government is a slow moving entity, just like anything of size, and govermental changes tend to take place over many years. Now, the governments of the world are catching up, and the battle over sales tax is part of that. Internet sales tax is coming, it’s just matter of how it’s going to happen. That’s why it’s important to be aware of how this is happening, and perhaps help influence that process so maybe a few more pennies are left over at the end of the day.

May 29th, 2011