April 23, 2017

Internet Retail Sales Tax and How it May Effect The Online Retailer

As the U.S. Senate works though passing a bill that would require all online retailers to collect sales tax on every U.S. retail sale, we need to look at what that means to the American online retailer from a technical standpoint.

Currently online retailers are required to collect sales tax only where they have a physical presence within the jurisdiction where the sale is being made.

Internet sales tax could be an ugly thing for anyone doing eCommerce. If we are going to be responsible to collect sales tax at the correct rate for every jurisdiction is the U.S., this could be a nightmare. I’ve looked into this and it would require subscribing to a service that interfaces with one’s eCommerce site so they can collect the correct amount of sales tax. Potentially one would be required to report and forward that tax to each state. This could require submitting 50 different reports (one for each state) each month even if one has not collected any tax. Could also require anyone doing business on the Internet to obtain business and or tax licenses in all 50 states.

This could potentially stop anyone from setting up a retail site on a shoestring in the hopes of building a business. This would put eCommerce in the hands of those with the time and money to comply with this type of regulation.

I’ve dealt with retail sales tax on two eCommerce websites. With one client I was able to connect his shopping cart to his state’s sponsored system that provided tax tables for all jurisdictions in his state. The system was supported by the state and maintained at one of the state’s universities.

During this project I wondered what would happen if the University stopped supporting that project.

On top of that, interfacing his shopping cart was time consuming and the documentation was lacking. They did provide a phone number to call. The turn around time was in the 24 hour range. For a busy retailer 24 hours could mean a significant loss of revenue. On top of that I would never want to deal with 50 sates with 50 different ways of connecting to their system.

The other retailer opted to collect tax at a fixed rate for the two states they had a presence in. Everything was contained within their shopping cart application. This did require the ongoing expense of a CPA firm.

And what about those audits? If you run an eCommerce website and you are audited it could cost you thousands of dollars to prove you are in compliance.

Several new cottage industries could spring to life to help retailers meet this new requirement.

Requiring online retailers to collect sales tax would create at least 5 unintended side effects.

  1. A small industry could be needed just to help online retailers connect to and stay connected to those third party sales tax table providers.
  2. Of course there would be an expansion of those companies that provide the real time sales tax rates to online retailers.
  3. A new industry would be birthed to help online retailers become and stay compliant with all 50 states sales tax requirements.
  4. Most online retailers would need to consult with one or more tax professionals and may have to use a third party service to comply with all the potential reporting requirements.
  5. Less opportunity for the small guy.

A small online retailer might spend two or three thousand dollars a year to comply with any new Internet Sales Tax law.

Who wins and who loses? Obviously with any new law there are unintended consequences. This law would be no different. The two main losers are the consumer and the small online retailer.

This law, if passed, may very well kill the ability of the small company to sell on the Internet. For the small guy, building an online retail business would probably be a thing of the past.

Who wins? The states do because they would collect more tax money. Big business is a winner because there would be reduced competition. CPAs would have another area to expand into. Those who provide the tax tables for a fee would expand their business overnight. It would be a boon for them. And of course the cottage industry that develops to do the technical aspects of tying a shopping carts into a tax table providers and making the system access and collect the right tax amount every time would win. Not to mention the industry that would be created to aid in compliance.

This is a much more complex issue than most people think. It is much more complex than a physical retail store. The physical retail store uses the same tax rates for every sale. It is easy to be in compliance because they are dealing with 2 to 4 taxing authorities and a small set of rules. An online retailer could potentially be required to comply with every rule in every jurisdiction. What a nightmare!