Because most philosophies that frown on reproduction don't survive.

Monday, April 29, 2013

Amazon, Small Business and the Sales Tax

Legislation is making its way through congress that will impose sales tax on most online business transactions. Currently, businesses are required to collect sales tax if they have "significant" physical presences within a state. This can mean either a retail location or a warehouse. If a retailer is completely out of state (say I'm in Ohio and all of the business's facilities are located in Maine) it is not required to collect sales tax. Generally speaking, the states require that in such cases consumers voluntarily report the purchase to their state of residence and make the appropriate payment, but in practice, basically no one does this and it's unenforceable.

As online retail has grown, more and more people have advocated that online retailers be forced to collect sales tax as well. The populist explanation for this is that it protects "mom and pop businesses" from being crushed by Amazon. If local retailers have to charge sales tax while out-of-state online retailers do not, then online retailers get to offer 7-12% lower prices right out of the gate.

There's some truth to this, though I think that the main things that afflict small local businesses are that they often don't offer the selection of online retailers, plus going to your computer is more convenient than going to a store. However, what it misses is that many of today's "mom and pop businesses" are online businesses. The current legislation does exempt businesses with total sales under $1 million, however that's not really as much as it sounds. If an online retailer is making 10-20% gross margins after cost of goods and shipping, a business with $1 million dollars in total sales is probably only supporting 1-3 people at fairly middle class wages. For that kind of company, having to deal with the paperwork involved in collecting and paying sales taxes for 50 different states would be a major obstacle.

When I briefly ran a very small online retail business, just dealing with the sales tax for the 3-5 orders a quarter from my own state was a pain, having to do that times fifty seems pretty unimaginable. My business didn't have anywhere near $1 million in sales, but I did once work for a couple years at a small business which had $20 million in sales and employed 15 people, and even there having to file quarterly sales taxes with fifty different states would have been a massive increase in our workload.

In the modern world, "small business" does not just mean brick and mortar shop fronts in your home town, it means small specialty retailers that operate in the online world. Two I particularly like that provide good examples of this kind of dynamic online small business are Classic Shaving and Saddleback Leather Co. These offer the kinds of specialty products you might not be able to find outside one of the largest cities (if there) through an online environment, and do so with far more personality and passion for quality products than online (or brick and mortar) mega-retailers. They're also the size company that would be hit hard by this kind of legislation.

By comparison, filing taxes in all those states is something Amazon can do without even batting an eye. And if everyone has to do it, it doesn't impact their price advantage either. That's doubtless why Amazon is supporting the bill.

There's a myth out there that big businesses hate regulation. They may not love it, but in fact they often are willing to make friends with it because they have deep enough pockets to coopt the process of writing it, and they know that they can afford to comply with it better than their smaller competitors.


Jenny said...

Amazon was adamantly opposed to this type of legislation for years, but now supports it. Couldn't be that they are big enough to cope now and know that their smaller competitors will be put out of business by it.

I am not opposed in theory to making online businesses collect sales tax. It does seem to be unfair advantage, although when you add in the cost of shipping the advantage mostly disappears.

What I don't understand is why they want to make these businesses collect taxes for every state in the Union. When I go visit you in Ohio and maybe buy some groceries while there, the clerk does not card me to find my state of origin in order to send my sales tax to Tennessee. They would charge me the Ohio sales tax and send my tax to Ohio.

Why can't a similar solution be used for online retailers? Collect the sales tax for the state the retailer is in and send the money to that one state. Equitable in tax burden and equitable in overhead burden for both big and small, online and brick and mortar businesses.

mandamum said...

Good point. But *which* state the retailer is in? But I guess for a small business with only one foot on the ground, it would make things simpler.

This sort of makes me laugh now, since I've moved to WA and Amazon charges me sales tax anyway....

It is telling, isn't it, who supports legislation. WA recently decoupled liquor sales from state control, and Costco was a huge driving force behind that. I'm pretty sure it's saving no consumers any money, even at Costco volume/prices.

Michelle said...

You'd also have a mad dash for online businesses to locate in Oregon/Montana/Alaska - states which have no sales tax.

I can see the problems with filing sales taxes in 50 states and numerous localities, but why can't technology take care of this problem? I would guess that zero small online businesses write their own shopping carts, so if the companies that handle credit card processing (paypal and others) could collect and electronically remit and file sales tax on behalf of small businesses, there may not be any additional workload. This would be a way to compete with Amazon.

While we're at it, online businesses shouldn't be charging shipping - it's part of their cost of doing business. I don't pay a fee to walk into my local hardware store.

And I am also in WA state. My husband and I laugh about how Costco wrote our liquor laws.

Jenny said...

Yeah, you might have companies scrambling to relocate just like all the corporations are in Delaware, but I'm sure some guidelines could be worked out in the weeds of the legislation. I think the general principle should be that the tax receipts go to the state of the business not the buyer.

Here in Tennessee, we are in our latter days of tax-free Amazon. They opened a distribution center here and will start charging tax in Jan 2014.

I wish our liquor laws were written by Costco here. Surely beats the Southern Baptist Convention that controls them here. We are in the middle of a multi-year battle to get wine sales permitted in grocery stores.

Marie said...

Yes, it's definitely a myth that big corporations hate regulation. In agriculture, it's particularly stark.