After a rocky beginning to the relationship, I’ve grown to appreciate Amazon.com. For the most part, the online retailer still boasts the best prices, shipping can be free, and if your purchases are delivered to New Jersey or one of several other states, Amazon doesn’t add sales tax to the purchase.
Lobbyists that represent all retailers, almost all of which are not Amazon and other smaller online businesses, see the avoidance of sales tax as unfair competition. Under current law, online retailers only charge sales tax when the company has a physical presence — a warehouse or an office — in the same state as the buyer (or recipient of the delivery). The issue of sales tax is one for the states and cities.
Brick-and-mortar stores are already at a disadvantage. They have to pay for retail infrastructure, like storefronts and employees to manage and sell products in those stores. With higher costs, stores with physical locations need to sell their products at a higher price to maintain profits. From a shopper’s perspective, especially a frugal-minded shopper who shops around for the best price, brick-and-mortar stores need to price more competitively. These old-fashioned retailers need to adapt to a changing environment if they want to be profitable and survive. That’s free-market capitalism.
The proposed law will change the rule. Any business with more than $1 million in annual sales will need to charge sales tax for every customer who lives in a state that has a sales tax — all but five. Each business will need to know how to calculate that correct sales tax for each customer. That’s easy enough for a company like Amazon, but for a family business that has taken its shop online only to see viral success, this could be a burden. Trying to determine the correct sales tax for a delivery in New York makes business owners cringe thanks to the variety of tax rates on the local level, within the same ZIP code, and a small business will not be equipped to handle this.
There is some good news for some businesses. If you are a accountant who provides services for retail businesses, your pool of clients is getting bigger. If you are a software developer in the retail industry, many businesses will be looking for affordable solutions for calculating and collecting sales tax. The new or increased need for these services must be paid for, and that’s most likely to come from an increase in product sales.
The $1 million exemption should ease the burden on truly small companies.
Not only will customers also have to pay sales tax when shopping online, but the prices they pay will eventually be higher, which goes further to negate any pricing advantage shoppers see from online retailers.
Did you know you’re supposed to volunteer to pay a tax for purchases where the retailer doesn’t collect sales tax? Each state with a sales tax has a special question on their income tax returns. If you made a purchase at an out-of-state retailer or an online retailer that did not charge sales tax, you are supposed to let the state know about any purchases that qualify and pay the appropriate sales tax when you file your income tax return. As I understand it, very few people do this, and states have no ability to enforce the law.
States lose about $12 billion in total revenue because of their lack of enforcement ability. The new law will recover all of it. With many local governments operating in financial crisis still due to the economic recession, the newly-found revenue will help necessary local government services remain functional. This won’t have the same impact or reach as recent federal stimulus plans, but having $12 billion is better from a planning perspective than not having $12 billion.
By the same respect, that’s $12 billion less in the consumers’ hands for spending on more products; in fact, when the products and services you can buy today cost $12 billion more “tomorrow,” when the tax goes into effect, that could be considered backdoor inflation — where increased costs are the result of tax law changes, not necessarily an increase in the money supply.
I’m most interested in how you think this change to the collection of sales tax will affect your shopping. Will you be, as the lobbyists hope, more likely to patronize your local stores once your favorite online retailer charges sales tax for internet purchases?
I don’t think this will affect my shopping behavior. Once you grow accustomed to the convenience of online shopping, you will be more likely to continue that convenience, even if it comes at a cost. But I may be different than other people. Will you shop differently?
Published or updated May 6, 2013.