Sales Taxes for Online Retailers Move Closer to Reality

Online sales tax

A cushy tax break that online shoppers have always enjoyed might soon be coming to an end -- which is good news for retailers with physical stores.

Brick-and-mortar chains have long complained that e-commerce retailers like Amazon (AMZN) enjoy an unfair competitive advantage since they're not obligated to collect sales tax, enabling them to offer consumers lower prices.

But now, congressional support for a bill that would give states the authority to collect sale tax from online retailers is gaining momentum.

The House Judiciary Committee is expected to hold a hearing this month on the bill, dubbed, the Marketplace Equity Act, although a date has not been announced, according to the National Retail Federation.

The retail trade association is a major advocate of the bill, and even launched a campaign in May to raise awareness of the sales tax fairness issue.

If the bill becomes law, e-commerce shoppers could see an estimated 5% to 10% increase in the cost of their online purchases, according to reports.

A Blow to Online Shopping?

E-commerce in the first quarter of 2012 accounted for 4.9% of total retail sales, according to Census Bureau data. Nonetheless, online shopping is the fast-growing segment of the retail industry.

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"The fact is, a significant factor in the growth of Internet sales is due to consumers not having to pay taxes," Frank Dell, president of consulting firm Dellmart & Company, said during RetailWire's online forum on the topic when the bill was first introduced last year. "This helps the consumer justify ... spending money and having to wait for the purchase to be delivered," he said.

"The net effect of this act will increase consumer costs and reduce total consumer spending, increase Internet retailers' operating costs and slow Internet growth sales," Dell predicts.

Other industry watchers think the change will simply level the playing field between online retailers and their brick-and-mortar brethren.

"I doubt that there are many online shoppers [buying] for the tax savings! Convenience, selection, better utilization of time, free shipping (where applicable) etc, etc, are all much stronger motivators than saving the state taxes," J. Peter Deede, a partner with Deede MacDonald & Associates, a consultancy to the consumer packaged goods industry, said during the forum.

Nonetheless, "as with any cost change there will be some negative impact on Amazon and other online businesses," he said. "But talk to me a year from now and see where they are."


The irony is that while online heavyweights such as eBay and Overstock.com oppose the bill, Amazon is supporting it. That's because the e-tailer, which now collects sales taxes on purchases made in a handful of states where it has a physical presence, is expanding its network of warehouses so it can offer shoppers same-day delivery in some areas.

Online marketers have until now been exempt from collecting sales tax if they lack a physical presence in the state where a customer lives.

Because the expansion makes paying state sales tax an inevitability for Amazon, the retailer has come out in favor of a national law that requires its online competitors to collect and pay those taxes too.

If the bill is passed, and the no-sales-tax perk no longer factors into purchasing decisions, consumers will simply gravitate more pointedly to the stores that offer the best shopping experience, said Gene Hoffman, president and CEO of executive training firm Corporate Strategies International. "If every transaction has a sales tax, the retailer with the perceived best combination of price, service, value and fashion will win ... and the selling will go on," he said.

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