E-BUSINESS SPECIAL REPORT

Who’s Afraid of Internet Sales Tax?

Once thought to be a monster waiting in the shadows, poised to bludgeon online commerce, Internet sales tax is proving to be more of a nuisance than a threat.

Early this year, a half-dozen major multichannel retailers, including Toys “R” Us, Wal-Mart and Target, began collecting sales tax on online purchases. The transition came quietly, without much fanfare and, so far at least, without much fallout.

None of the publicly traded companies that tacked on sales tax has reported first-quarter earnings yet; most are slated to post results later this month. But analysts say one thing is already clear: The advent of widespread sales tax collection by big-name e-tailers has not dampened overall e-commerce growth. Will this promising trend continue in the future, or will consumers rise up against online sales tax as its prevalence grows?

Growing Strong

According to comScore/Media Metrix, online sales in the first two months of 2003, when tax collection began, rose 26 percent overall compared with the same time period last year, reaching US$13.9 billion. For nontravel spending, the category of sales most likely to be newly taxed, growth amounted to 19 percent, to a total of $7.8 billion.

“There will always be some subset of transactions impacted by the sales, at least enough to make the consumer think twice,” comScore vice president Daniel Hess told the E-Commerce Times. “But overall, I believe consumers already had the expectation that this was part of the cost of whatever they’re buying.”

In fact, Hess said, a majority of online sites have been charging sales tax on at least some purchases for a while. And although the tax holiday, so to speak, may have helped e-commerce establish a foothold, it probably is not nearly as important anymore.

“Had this happened three years ago, the reaction might have been different,” Hess noted.

Who’s Derailing What?

Indeed, one argument used to oppose online sales tax for so long was that implementing it would derail e-commerce growth. With e-commerce topping $45 billion in 2002, according to U.S. Department of Commerce data, that argument has lost much of its punch.

But some people never bought this argument anyway, saying consumers began using the Web to make purchases not because of lower prices, but because of convenience.

“[In] every survey we do, consumers come back saying they buy online because it is convenient, not less expensive,” GartnerG2 analyst David Schehr told the E-Commerce Times. “The sales tax question doesn’t change that equation much.”

Distracted Audience

Nielsen//NetRatings analyst Abha Bhagat told the E-Commerce Times that determining whether people have steered clear of certain e-tail sites as a result of sales tax imposition is difficult, since the invasion of Iraq diverted millions of surfers for a span of about three weeks. By the end of March, however, e-tail traffic was back with a vengeance.

In fact, Bhagat said, collecting sales tax online may help tighten integration between various sales channels for retailers.

“Now it becomes easier for [a] customer to return a product to a store, where before the lack of sales tax may have been a barrier to that,” she said. “It’s quite possible that, given that kind of ease of returning a product anywhere, it may be a net gain for merchants.”

Shopping Around

Still, Bhagat acknowledged that because the nature of the Internet promotes comparison shopping, in the short term, multichannel retailers that have begun collecting sales tax could lose business to pure-plays that eschew such charges.

But even that may be a short-lived phenomenon. Once-staunch opposition to a blanket Internet sales tax has weakened considerably amid state budget shortfalls, which have prompted states that have long defended a tax-free Internet, including California, to take another look at this issue.

But experts say online sales tax will not be the panacea states are seeking to help fill massive budget gaps. Although a widely quoted University of Tennessee study estimated states lost some $13 billion in tax revenue in 2001 because no online taxes were levied, that figure has been called into question. The Direct Marketing Association recently released its own study suggesting the figure is probably closer to $2.5 billion and is unlikely to exceed $4.5 billion until 2011.

Long-Term Impact Unclear

Meanwhile, with pure-play giants like Amazon and eBay still not on the sales tax bandwagon, the trend’s impact on the overall e-commerce sector will remain muted. After all, sales on eBay, where tax collection would be complicated by the nature of the consumer-to-consumer sales model, are expected to generate nearly $2 billion in revenue for the auction giant this year, and Amazon did nearly $4 billion in sales in 2002.

Slowly but surely, however, online sales tax is becoming an inescapable e-business reality. And although consumers have not yet revolted, it remains to be seen how well they will adjust over the long term.

4 Comments

  • I am new at this – I run an online store for a nonprofit – the arguement is – do we have to charge sales tax on the sales – we do not have a store front anywhere. I have been saying ‘no’ but I would really like something official to show our accountant because everyone else is afraid to not charge tax. Now, as the website designer/manager, my dilemma has been – what tax do we charge if we do? Most of the people buying things online are from out of state. Do I charge CA rates for everything as that is where we live? No, I shouldn’t – we have no real store here. How do you keep up with the rates from each state? Well, I am not THAT worried about losing customers online because most people barely reach $100 per purchase and the tax is not that much – yes, shipping is more expensive. My problem is – how do I program this into my site if I do charge tax? What do I charge? We’re a little company – our shopping cart is very simplistic – and I also do a million other things for the company and I need something definite to make this automated to a degree at least. YES, I think it would be great to not charge taxes online ever. That is my first pick. Of course. Second pick is for a universal tax for online (and to keep it small would be nice) – and for legislation to get on about it if they are going to do it. Someone said on this thread that it is wrong to not charge taxes and someone else said it is illegal to CHARGE taxes… and I sit here and say – we’re just a dinky little company – we’re not Toys R Us or Walmart – whom have stores in every state, I might add – so I assume they are using the loophole to get around paying and in paying now, they are choosing to not go the loophole route – so they are really not companies that I can compare to ours. What about the smaller – e-commerce only companies or nonprofits with giftstores and things like that?

  • The majority of companies have been charging tax -including Amazon. The companies NOT charging tax are the exception not the rule. I still believe we are being taxed to death and have to wonder where does this money go to?!?
    Subsidizing other states, sending 80billion to invade a country, take your pick. The collection of intranet sales tax is a license to steal.

  • This topic is very important to me because it is so misunderstood by most people I talk to. Brick and Mortar businesses (B&M) believe that Internet merchants have an unfair advantage because they do not collect sales tax but the B&M merchants do. They always say that to "level the playing field" Internet merchants should be required to collect sales tax.
    1. Sales tax IS collected in any state where the company has any physical assets such as a store (this is called Nexus).
    2. The shipping/box charges that Internet merchants must pay (whether collected from the customer or not) is usually much higher than the states sales tax. This already puts Internet merchants at a disadvantage. Add sales tax on top of shipping and it would be very hard to be price competitive.
    3. B&M stores are limited to filing taxes with only one state and their local city/county. This makes knowing the tax rates, what is and is not taxable and filing sales tax returns much easier. Internet Merchants would have to deal with over 7,500 possible taxing jurisdictions. If it was limited to just state sales tax, there are 45 states with a sales tax not to mention the home city/county sales taxes.
    4. Large discount chains such as Walmart and Kmart already have a physical presence in each state and know how to deal with all the sales taxes. They can afford to staff their sales tax departments with many tax accountants. If all Internet merchants were required to collect taxes they could use this as a competitive advantage on top of the other benefits they have for being so large.
    5. Other states provide absolutely no services to out-of-state Internet merchants. This is like free money. They take it in but do not need to provide any benefits for it. The local B&M’s get police, fire, roads, schools, etc. in return for collecting sales taxes. When an Internet merchant ships a product out of state, they pay UPS, FedEx, etc. who in turn pay taxes in that state for use of the roads for delivery.
    6. Local business people can vote their government leaders out if they do not like their policies or tax rates. The Internet merchants cannot. This is "taxation without representation" a founding principal in this country. Internet merchants can only affect their home state/locale.
    7. Internet merchants pay every other tax that the B&M merchants do such as federal income tax, state income tax, county taxes, city taxes, and these taxes are paid on all the money collected, not just the income received from the local state/county/city. Internet merchants pay tax and a lot of it.
    Just my views….
    gbanta

  • Nuisance or not. People putting up with it or not. It does not matter. It is illegal, plain and simple. States are not allowed to impose taxes on interstate commerce.
    If I order something over the phone and get it through the mail there is no sales tax so long as the company does not have an office in my state from which they ship the item.
    This internet sales tax will be illegal until we change the federal laws and constitution. It is that simple.
    Just because several states are pushing it and several big vendors have caved in does not make it legal or right.

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