Online sales tax closer
Heath E Combs -- Furniture Today, February 20, 2012
HIGH POINT - Brick and mortar furniture stores have long decried a perceived competitive advantage of online retailers because many sites don't collect state and local sales taxes.
That could change before the year ends. S. 1832, also known as the Marketplace Fairness Act, was introduced in Congress last year and is now in committee. It would authorize states to collect sales tax from remote sellers like Internet retailers.
While congressional legislative efforts to force Internet retailers to collect sales taxes are nothing new, what's different this time is that some big Internet retailers like Amazon have buckled in recent months and have agreed with states including Indiana and California to start collecting the taxes at a future date.
S. 1832 would begin requiring collection 90 days after legislation is passed. The bill exempts small sellers - businesses with less than $500,000 in remote sales. Through the bill, states can join the Streamlined Sales and Use Tax Agreement or adopt a set of simplified guidelines to collect sales taxes.
It aims to collect what a University of Tennessee study estimates is $11.3 billion in lost revenue from e-commerce sales taxes that states and localities won't collect this year.
Industry analyst Jerry Epperson of Mann, Armistead & Epperson said that online retailers were once unified against collecting state sales taxes. But as the Internet has evolved from its wild frontier beginnings into a solid and growing retail channel, some of those retailers are now viewing it as inevitable.
"I think most people recognized this was going to happen," Epperson said.
Two rules govern the current online retail approach to sales tax.
In 1967, the Supreme Court ruled in National Bellas Hess v. Department of Revenue that mail order resellers needed to have physical contact with a state - other than mail - to be required to collect state sales tax.
In Quill Corp. v. North Dakota, the Supreme Court in 1992 ruled that a business must have a physical presence in a state to collect, but said Congress could "overturn" the decision by legislating the parameters of state taxation.
While S. 1832 wouldn't overturn the Supreme Court rulings, it would allow Congress to authorize collection of sales taxes by states without retailers needing a physical presence, said Ronald Alt, a senior research associate with the Federation of Tax Administrators.
A number of companies, including Wal-Mart, Barnes & Noble and Apple, already collect sales taxes from online sales. But those companies have a physical presence in states, he said.
Alt said that collecting taxes "is doable, it's not a technical or logistical issue. It's sort of a cost pricing issue."
He said the Quill ruling dictated that issues affecting interstate commerce can only be decided by Congress.
He added that states already have laws on the books requiring that residents pay sales or use taxes on goods they buy out of state. "It's just not collected," he said. Buyers could voluntarily remit sales tax to the state for their online purchases, but few do.
In California, officials say the state will lose $4.2 billion this year as its 7.25% state sales tax goes uncollected on e-commerce transactions, according to the Tennessee study. (State sales taxes generally range from 4% to 8%, although a few states have no statewide sales tax.)
According to the National Conference of State Legislatures, which supports the bill, states face a collective budget shortfall of $72 billion in fiscal year 2012.
Furniture and bedding sales could be affected by the pending legislation. In 2011, online transactions accounted for about 8% of all sales in the categories, or about $6.4 billion, according to Furniture/Today research estimates.
Epperson said he thinks that having to collect sales tax won't kill Internet retailers, whose customers have proven that they will buy items like apparel and furniture without physically testing those items.
While the sales tax wouldn't directly cost Web retailers more - since it's paid by the purchaser - the fear is that it might discourage people from buying online if they do so partly to escape paying tax.
Making online retailers collect sales tax could make the Web a less attractive shopping venue for consumers, said Pulaski, Tenn.-based retailer Billy Joe Griggs, who recently sold the Internet sites that complement his brick and mortar store.
Not having to collect sales tax like brick-and-mortar stores have can make online retailers appear more competitive, and allowing them to offer retailer incentives like free shipping, Griggs said. Epperson noted, however, that online retailers do have higher costs in some areas - like shipping and returns - than the average brick and-mortar furniture retailer.
Griggs said that with local governments struggling, states were bound to start requiring collection of sales tax from retail websites.
"From the shape the country's in and the states are in, they need every dollar they can get," he said. "But I hate to see them do it because then the consumer's going to have to pay more and the online stores aren't going to be able to compete as well."
Furniture/Today contacted several online home furnishings retail sites. None agreed to comment on the record for this story. The National Home Furnishings Assn. retailer trade group did not respond to requests for comment.