“Should Internet Retailers be Required to Collect State Sales Taxes?”
January 4, 2015
By: Rick Green
The Marketplace Fairness Act (Internet sales tax) has been hailed by state governments as a cure to lower revenue during the economic downturn. Surprisingly, it is also supported by large retailers like Home Depot and Amazon.
The Internet sales tax is not new, though. Rather, it is an existing tax that goes uncollected. Most sales taxes in the US are actually “sales and use” taxes. That means that consumers buying goods on the Internet are liable for use taxes in their home state, but states don’t collect them for both economic and political reasons. Economically, collection costs exceed the potential revenue, and politically there are few elected officials willing to run on a platform of universal tax audits.
The Internet tax appeals to state and local governments because it solves the political problem. Using the federal government to force out-of-state businesses to collect taxes removes local politicians from the line of fire. The economic problem still remains, though. The exorbitant cost of collecting the taxes has simply been shifted onto businesses.
Let’s take the case of a $10 million ecommerce retailer. Using the Massachusetts sales tax rate of 6.25 percent as a proxy, this retailer has the potential to collect approximately $625,000 in sales taxes annually. According to the Tax Foundation, there are 9,998 state and local sales tax jurisdictions in the United States. That yields an average of $62.50 per tax authority annually, or a standard monthly remittance of about $5.21. Just imagine writing 10,000 checks for $5.21 each month. The cost of stamps and stuffing envelopes alone would lead to bankruptcy. Now it’s clear why large retailers are lining up behind the Internet sales tax: It will put their competition out of business and could damage many industries Contract lifecycle management.
The ultimate problem with the Internet sales tax, however, is that it won’t actually generate any revenue. Most states collect more money from income taxes than sales taxes. The loss of payroll taxes and corporate income taxes are due to small retailers going out of business or scaling back hiring which will likely more than offset what little revenue is actually generated. However, some online business have worked out more effective ways to keep their businesses going by increasing their sales. Using online marketing strategies, such as this marketing funnel template, can help more businesses convert their potential sales into actual sales. This is beneficial for smaller companies because it means that the Internet sales tax won’t hit them as hard, as they will be making more money, hopefully.
Finally, most small companies simply won’t collect the taxes. What state or city would really send a tax auditor to collect a check for $5.20? On second thought, perhaps businesses should keep a few thousand checks handy, just in case.
Rick Green is the CEO of 1A Auto Inc. located in Pe
pperell, Massachusetts and is the founder and chairman of Massachusetts Fiscal Alliance. To read his argument online, click here.