Retail Merchandiser | Representation Without Taxation? A Look at E-Commerce and Sales Tax
by Jonathan Barsade
The Internet is the last new frontier, but the tax collectors are finally laying down the law. Ten years ago, Amazon designed a business around sales-tax-free commerce, creating a significant market advantage over brick-and-mortar retailers. Today, Amazon has resigned to the inevitable: that it too will have to comply with the same tax obligations as every other business in America.
So what brought about this change?
In the early days of ecommerce, states and brick-and-mortar retailers didn’t think much of online sellers like Amazon. They just sold books. Search was cumbersome. It didn’t have the personal touch or knowledge of salespeople. It took five to seven days until the book was delivered. It was Barnes & Nobles’ problem.
Then, the ecommerce boom shifted these attitudes. States realized they were missing out on billions in tax revenue. Brick-and-mortar businesses were becoming less competitive because local sales tax obligations created an artificial obstacle elevating their prices relative to online sellers. However, online sellers had a legal defense: they claimed that an old Supreme Court case, Quill Corp. v. North Dakota, protected them from having to comply with sales tax obligations.
The states, looking to impose their tax rules in this new frontier, are fighting on two fronts. For one, they are introducing new interpretations of what is known as “nexus” – the link between a business and state that justifies tax collection. In 21 states, a so-called “Amazon Tax” has exposed online merchants to the sales taxes paid by brick-and-mortar businesses. The other front, legislative, is the proposed Marketplace Fairness Act, which will grant states the power to collect sales tax from out-of-state sellers.
So what affect will this have on ecommerce companies that have enjoyed business without taxation?
Some researchers at The Ohio State University have suggested that Amazon Taxes and the Marketplace Fairness Act have a severely damaging effect on companies like Amazon. Their study found that when sales taxes were enforced, it resulted in a decrease in Amazon sales. However, their study and conclusions suffer several shortcomings. “The Amazon Tax: Empirical Evidence from Amazon and Main Street Retailers” found that households living in California, New Jersey, Pennsylvania, Texas and Virginia reduced Amazon spending by 9.5% in response to the Amazon Tax. However, they increased purchases at local brick-and-mortar retailers by 2% and spent 19.8% more with other online retailers. For higher ticket items (over $300), they found that consumers were especially prone to shift purchases from Amazon to other merchants.
Here’s the problem: in each state, the researchers surveyed spending over the 12 weeks immediately following passage of the Amazon Tax. Given what we know about Amazon, they can adapt to sales taxes and other changes in their competitive environment. Indeed, their massive investments in fulfillment centers, predictive analytics and other advantages will allow Amazon to match just about any competitor on price. Even companies like Amazon require some time to make pricing adjustments. Thus, the study does not take into account the amount of time it takes for a company like Amazon to adapt to new price sensitivities.
Also, notice that the Amazon Tax did not reduce online commerce in general. Instead, consumers shifted their dollars from Amazon to other online retailers (some of which might have collected sales taxes themselves). In other words, the study proved what we already know – that online consumers are price sensitive in their online activity. The Amazon Tax did not hurt ecommerce.
That all said, what would hold us back from subjecting online sellers to taxes?
Some people believe that it’s too hard for ecommerce companies to collect sales taxes, especially if they sell in multiple states. This reasoning draws on Quill Corp. v. North Dakota, a case in which the Supreme Court ruled that it would be too burdensome for small businesses to track the rates and rules of 10,000 taxing jurisdictions. That was back in 1992.
Since then, innovators have made cost-efficient, automated solutions to address this burden. Those who use the “undue burden rationale” as justification for opposing sales taxes on ecommerce are either still living in 1992, or they are just trying to take advantage of the legal uncertainties that emerged from the rapid growth of the Internet. An online merchant selling in all 10,000 jurisdictions can comply with sales taxes just as easily as a brick-and-mortar business selling in one jurisdiction.
Ecommerce businesses exist in the physical world and benefit from taxpayer funding. Without roads, postal systems, governments, telephone wires and fiber optic cables, Amazon is not much of a business. Assuming that the Internet is a method of communication and transferring information – and not a new metaphysical frontier – there is no rationale for giving ecommerce preferential tax treatment. If the lobbying dollarsshelled out by Amazon are any indication, they have representation. Now it’s time for taxation.