Amidst all of the drama in Washington right now, you can be forgiven for missing the latest legislative action concerning the Internet sales tax. It happened in February, wedged somewhere in the news cycle between Donald Trump’s wall and Hillary Clinton’s e-mail server: the Senate voted to permanently bar state and local governments from taxing access to the Internet. As part of that vote, Senate Majority Leader Mitch McConnell promised to hold a vote later this year that would allow state and local officials to require online retailers to collect and pay sales taxes.
Don’t hold your breath.
The Internet sales tax, colloquially dubbed the Amazon Tax, is one of the longest-running and hotly debated sales tax issues in the country. Roughly half-a-dozen different versions of tax plans designed to capture local sales tax on goods sold over the Internet have been introduced between 1998 and 2016. In fact, the precedent for this actually dates back to a 1967 Supreme Court case called National Bellas Hess v. Department of Revenue, which addressed the issue of remote taxes for a mail order business based in Missouri which sold goods nationally.
With each new bill introduced to address the issue, the major obstacle to implementation typically comes down to a combination of political wrangling and a surprising level of complexity. You see, there are just under 10,000 different taxing jurisdictions in the U.S., each with different compliance requirements, rates, and collection processes. Without sophisticated enterprise software, it would be enormously challenging for national (let alone multinational) e-retailers to keep accurate tabs on sales and related taxes, and tax changes, in each jurisdiction in which they do business. The task of enforcing it on the part of the U.S. government would be even more daunting.
So, as the quagmire of logistical hurdles and related political pressures start to enter the discussions, federal efforts to bring some standardization to the Internet sales tax process eventually goes off the rails.
This is good news for digital retailers. But there are a couple of constituencies that have a very different view on the matter: state tax authorities and brick-and-mortar retailers.
The state perspective is pretty straightforward. As more retail shopping moves onto the Internet, they are losing revenue.
In response, a loosely-coordinated coalition of 13 state governments has now united to start imposing local taxes on Internet-based sales themselves. Ultimately, the group is hoping that their effort will create enough confusion and anxiety on the part of e-retailers that it forces a move at the federal level. Joe Garrett, deputy revenue commissioner in Alabama, which is one of the states in the coalition, described his state’s stance on issue, saying: “We’re confident that some remote sellers will not comply and therefore it will lead to litigation.”
The other major players in all of this are traditional brick-and-mortar retailers who’ve long argued that a lack of a concerted, federal tax law governing remote sales puts them at competitive disadvantage. One of the most vocal organizations speaking on behalf of these retailer has been the International Council of Shopping Centers.
I recently spoke with the organization’s President and CEO, Tom McGee. He explained the heart of the matter from the retailer perspective:
“Under the current system, online-only retailers are not required to charge most consumers sales tax... Brick-and-mortar sellers, on the other hand, are required to collect and remit sales taxes as a basic part of doing business. For consumers, that means they’re paying as much as 10% more to purchase a product at a retailer in their own community versus online. Basically, this amounts to our government picking winners and losers, and it shouldn’t be.
The consequences are closed businesses, an estimated $23 billion in lost sales tax revenue, putting upward pressure on other forms of revenue like property or income taxes, not to mention the job loss from local businesses closing.”
In McGee’s view, the change needs to happen at the federal level in order for it to work. He added:
“States are sending a clear signal that they’re frustrated with Congressional inaction and they are creating a patchwork set of rules and laws. The problem with this scenario is that it leads to an overly-complicated sales tax system. Congress was given the Constitutional power to provide the rules governing interstate commerce and is best-positioned to solve this problem.”
It’s an important perspective to be sure, and, as you peel back the layers, you start to quickly see why the Internet tax issue has become such a political hot potato. Digging even deeper into the issue, it becomes less about black-and-white online and offline retailers and more about unnecessary layers of complexity that are currently making it more difficult for all businesses to operate through this period of federal indecision.
As an example, I asked McGee, about the implications of an Internet sales tax on businesses operating in Main Street shopping centers that also have strong digital sales channels, and he explained that developing a common standard is even more important to them:
“Omni-channel shoppers—those who shop online and in the store for example—spend 3.5 times more than other shopper types. Approximately two-thirds of consumers that buy online say they use a store either pre- or post-purchase. Additionally, retailers will tell you that when they close a store in a specific community, their online sales decline as well…
We need clear rules and standards put in place that reflect today’s marketplace and encourage the exciting future developments in retail. But we can’t do that if we are asking sellers and our state and local governments to operate with standards that were set in 1967.”
Will the legislation ever get passed in the current political environment? Certainly, I don’t expect to see anything significant happen before November. But at some point, as the various parties to the issue continue to see their levels of frustration grow, something’s got to give. This stubborn challenge that has been simmering for decades will eventually boil over.
