Taxes for E-Commerce and Online Transactions – Is it Fair?

May 16, 2013

“Internet Taxation” has been quite the buzz lately. Especially since the United States Senate passed the “Marketplace Fairness Act” which essentially forces businesses who make money online to pay taxes to the local and state governments in which the purchaser resides.

If you haven’t heard of this new bill here is the lowdown:

  • Purchases made online could be taxed at the local government level just like if you walked in a retail store
  • The wording could actually apply to any downloadable app or service basically any digital good will have to collect the tax. (Here’s to a tax on your next iPhone or Android app download!)
  • It will exempt companies with revenue less than $1 Million dollars (is that profit? or Gross Sales?)

So with that being said is this truly a Marketplace Fairness Act? Or is it something that was designed to help bolster big companies and drive new revenue sources for State Governments who are having problems balancing budgets?

First of all the lines are drawn between those in favor of and those opposed pretty clearly. You have such internet giants as eBay and Amazon on opposite sides, with Amazon supporting it and eBay opposing the bill, claiming many of the small mom and pops which sell through the eBay platform would be unduly burdened. Huge retail big box stores like Walmart Macy’s and Best Buy support the bill and say this would level the playing field. Ginny Marvin has a more in depth article about this on Marketing Land

Why I Believe this isn’t a good thing

This isn’t going to turn into a rant about why I think Congress (most of whom have no real business experience shouldn’t be regulating businesses) shouldn’t be arbitrarily and micro regulating businesses. The question really is will these companies making $1 million a year in revenue really be able to support the new regulation.

Here at Get Found First we work with a lot of e-commerce retailers and many of them you could consider “Mid-Size or Small Busineses”. We work to truly understand the businesses of our clients, their challenges and their opportunities and many times insights into their revenue and profitability, because this helps us make better holistic decisions into their marketing. Many of these companies will fall into the more than a million a year bucket. But that doesn’t mean they have hundreds of thousands of dollars to throw around. Many businesses make a 3-5% profit margin, has nobody heard of cost of goods? How much do you think having to manage, and payout all of the new taxes which this bill will require them to do will cost them in money and in time?

Could you imagine having to now try and manage at least 50 different state tax rates, collect the taxes and remit them properly? What about if say 10 of these States decide to “audit you”? This is a regulatory nightmare waiting to happen for smaller internet retailers. In some cases the extra burden could potentially require laying off staff or force businesses to try to limit business. What about if a local business that makes a million dollars a year had to start remitting taxes to all of the local governments based on where their customer lived? How is this honestly any different?

Bottom Line it Isn’t Going to be Easy – to collect Sales Tax for multiple States.

If it’s fairness you want then it’s fairness you should give. A big problem in the travel industry and a cause partially for the growth in OTA’s (Online Travel Agents like Expedia) is that they only charge the local taxes based off of the “wholesale” rate that they get for hotel rooms. So if a hotel only charges $80 for Expedia to sell the room and Expedia sells it for a $100, they say they only have to pay taxes on the $80. That other $20 isn’t profit, it’s fees they charge and you shouldn’t pay taxes on fees is their logic. Yet the advertised “room rate” is $100 a night not $80. Using that logic every retailer in the country should only pay sales tax on the wholesale rate for goods and their markups should be changed to “fees”. The OTAs even went as far a couple years ago to try and get a bill passed (which almost did) excluding them from local taxes on the markups. How can Congress be ok with OTAs not collecting the local taxes but expect small online retailers to do the same? How is that fair?

I’m not saying there shouldn’t be a sales tax for online sales, but I do enjoy not having to pay one sometimes. However this bill passed by the Senate is not the right way to go about doing this. This is going to make life for small and mid-size online businesses more complicated and has the potential to limit business innovation and growth.

What do you think?

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