The vote on raising taxes for online retailers and their consumers is getting closer. The Senate is planning to vote on Internet sales taxes some time in May to determine if online retailers will be responsible for collecting sales tax for out-of-state consumers (see also: The Great Online Sales Tax Debate). Should this bill come to pass, Internet retailers that do NOT meet the Small Seller Exemption (less than $1,000,000 of total remote sales) will have only 90 days to begin implementation (source: http://www.marketplacefairness.org/compliance/). So how will this effect Online Stores, Inc.?
Online Stores, Inc. is an online retailer with sales of $30m a year. We have studied the Marketplace Fairness Act and estimated our cost of implementation and compliance. We have used these estimates to extrapolate the costs for the industry. Here are our conclusions (see below for link to calculations on how we came to these conclusions):
$4.9 billion in additional sales tax will be collected for the states
Of this, $3 billion is from companies larger than $50m in sales. Our estimate is lower than other estimates as they do not consider the high percentage of eCommerce revenue which is through retailers with “brick and mortar” operations like Walmart, Target, Best Buy etc., who are already collecting sales taxes. Other estimates also do not consider that a significant percentage of “retail” eCommerce transactions are purchases by businesses, where tax is paid as Use tax, and many retail eCommerce sales are vehicles, where taxes are collected through the vehicle registration process.
$2.4 billion cost of collection in year one ($1.2 billion year two)
Year one costs include setup of systems and software to calculate and collect the taxes, management time to understand the complex sales tax laws of 40+ states, and classification of products into tax categories for different states. For companies under $10m in sales, the cost of collection in year one is 40% greater than the tax collected, in year two it is 70% of the tax collected. Most companies over $100m are already collecting (Walmart, Best Buy, etc.).
228,000 jobs are lost as a result
Online retailing is very competitive, driven by the market leader Amazon which is running at only 1% net profit. Companies are investing in website technology to support shopping on mobile phones, compliance with credit card security rules, faster delivery and better customer service. The compliance cost in year one will be greater than the average level of profitability for companies under $10 to $20m. It also adds a very significant burden to management, taking time and resources away from competing against larger competitors. For many smaller companies and even some larger companies the Marketplace Fairness Act will be the straw that breaks the camel’s back. We estimate 9,600 companies will fail, including almost 30% of companies under $10m in sales. The estimate does not include loss of employment at suppliers, shipping companies and service providers such as accountants and software developers.
$8.16 billion lost wages, $3.4 billion lost in federal and state income taxes year one
As a result of 228,000 lost jobs, $8.16 billion in payroll will be lost, plus $2.45 billion in federal and state income taxes. The $2.4 billion in collection costs reduce profits by a similar amount resulting in a reduction in Federal and State taxes of $1 billion. The net collection of additional tax across State and Federal government is only $1.45 billion.
90 days to notice to start collecting will cause chaos
Many companies will be forced to use a single supplier, Avalara, due to technical issues. One company is unlikely to be able to bring over 20,000 new customers online in such a short amount of time. Yahoo Store shopping cart is the most widely used software by small retailers. It is not designed to collect sales tax for all states and is not integrated yet with Avalara. Many retailers will be forced to switch shopping carts in a very short period of time to be able to collect the taxes, go out of business, or not collect the taxes and risk fines and penalties. We suggest a 12 months’ notice period.
The proposed law impacts manufacturers, not just online retailers
Manufacturing companies often have very profitable direct eCommerce operations selling products and spare parts directly to consumers and wholesale customers. These companies will need to comply with the law and put into place systems to collect tax, or stop selling directly. This increases the number of companies that will have to collect the tax significantly.
Exemption should be $100m
Introduce the bill, but make it apply to companies with more than $100m in retail sales, and with at least 12 months’ notice. These companies can mostly collect the tax and only a few will be seriously impacted.
Collect sales tax on Amazon and eBay
We suggest the marketplaces with over $100m in sales (Amazon marketplace, eBay, etc.) be required to collect and pay the sales taxes on behalf of all sellers on those marketplaces. This will collect a large amount of tax revenue at minimal cost to the sellers, as Amazon and eBay will do the paperwork and pay the taxes to the states. The states will also not have to deal with 10,000 taxpayers, just two, which will be much easier for them.
Online Stores, Inc. has forwarded these concerns and suggestions to members of the Senate in hopes they will understand the effect this bill will have on smaller online retailers.