Why You Should Care About an Internet Sales Tax

A proposed law that would make small online retailers pay taxes on Internet-based sales is meeting opposition from eBay and being supported by Amazon, both of which spoke before Congress last week.

Larger retailers have been pushing for a reform to the tax law through the Retail Industry Leaders Association. They consider the current tax law unfair since online retailers are not required to pay out-of-state taxes that brick-and-mortar businesses have to cough up.

Currently, online businesses aren’t expected to collect tax on out-of-state orders unless they have physical offices in the state in question. This allows a California business shipping to Colorado to not collect sales tax for Colorado.

But a new House bill, H.R. 3179, would force state tax collection in cases where states simplify their tax law enough to reasonably allow It. There would be an exemption for businesses earning less than a million dollars a year nationwide and selling less than $100,000 in the state in question per year.

Why eBay Is Concerned

While an exemption for businesses that make under a million dollars a year may sound like it appeals to eBay sellers, it doesn’t. Tod Cohen, eBay’s Deputy General Counsel, told CNET that it would not appeal a law with a higher exemption, although he did not specify what that exemption would be.

eBay’s highest tier of Power Seller, Titanium, starts at $1,800,00 per year. The second-highest, Platinum, starts at $300,000 and would include businesses earning between one million and $1,799,999 per year. While there is no conclusive data on how many sellers of these tiers exist, eBay is certainly going to pull out the big guns to fight for them, considering how much eBay would make in fees from such large-volume sellers. Thirty-eight percent of eBay sales come from top-rated sellers, a designation that occurs across all income categories, but would almost surely include a significant percentage of high-volume sellers.

Why Amazon Supports the Bill

In an about-face from its earlier stance on the issue, Amazon is supporting H.R. 3179. “Congress should authorize the states to require collection, with the great objects of protecting states’ rights, addressing the states’ needs, and leveling the playing field for all sellers,” said Paul Misener, Amazon’s VP for global public policy, in a statement.He went on to point out the difference between Amazon and Ebay’s relationships with their sellers. “While Amazon is prepared to make its technology available as a service to help sellers by collecting sales tax for them, eBay seeks to avoid any role in collection, claiming that small volume sellers will be burdened.”

Small Businesses Should Be Concerned

Once the government puts the framework in place to properly collect out-of-state tax from Internet retailers, there is a very real danger that it will reduce or remove any dollar-amount exemptions put on the program. It would be a very easy revenue source for state tax coffers once the framework is in place.

If you’ve got a business that’s been paying state taxes for years, you may resent the tax break that Internet retailers are getting, just as the Retail Industry Leaders Association does. And this is a valid point. The face of retail is so different now that maybe we should be looking at Internet business and physical business as occurring in the same space when it comes to the tax code. Why shouldn’t an Etsy seller pay the same tax as the craft shop down the street?

The president of Overstock.com explained to the same Congressional panel last week that his business would not have gotten off the ground with the proposed tax legislation in place. But how many physical businesses could use the same tax break to grow their business?

Why Not to Worry in the Short Term

The proposed legislation makes a very large assumption: that states will simplify their tax systems to make it easy for out-of-state retailers to pay. While there may be enough financial incentive for individual states and jurisdictions to do so, it would take years before most states and jurisdictions manage to implement the legislative and administrative changes needed to enforce the legislation.

While the mid-size online retailers may not elicit sympathy from a public hit hard by a recession, those struggling to make a small online business work could be affected in the long term by the proposed legislation. Sometimes it’s nice to have a giant like eBay on your side, because the couple running a retail website out of their basement can’t afford lobbyists.

Angela West dreams of opening a Fallout-themed pub featuring wait staff with Pip-Boys. She’s written for big insurance companies, small wildlife control businesses, gourmet food chains, and more. Follow her on Twitter at @angelawest and Facebook.