Efforts to force internet retailers to collect sales tax seem to be strengthening. Brick and mortar retailers are spending a lot of money to try to get federal legislation passed because states currently cannot force businesses outside their jurisdiction to collect sales tax on orders shipped into the state.
The impact of this legislation will be felt by internet retailers at two levels:
1) It will remove a competitive advantage. The fact that most e-tail purchases do not require sales tax to be collected is partly responsible for the huge growth in online retail.
It is important to understand however, that this advantage is offset by a huge disadvantage that internet retailers have–the cost of delivering orders to customers. In our experience, shipping costs are usually higher than taxes that we would collect. In fact, our shipping costs usually run 9% of revenue while the average sales tax rate is probably between 6-7%.
It is also true that overhead is lower for mail order/internet retailers than brick and mortar retailers, which is a major reason that you can normally buy products online cheaper than you can in a traditional store. However, if the sales tax advantage goes away, things are definitely going to get a bit tougher for e-tailers.
2) It will create an additional drain on resources. It is virtually impossible for any retailer to keep up with what products are taxed at what rate in every county of every state.
Here is an example of the nightmare this can cause. In my industry, certain products we sell are considered food products and are taxed differently than herb products. However, the definition of a food product changes from county to county. Rather than trying to figure this out, we just pay the maximum sales tax rate here in Georgia because it is just not worth the effort to try to figure out where every product we sell fits into the tax structure of every county in the state.
Companies are going to have to purchase expensive software to figure how to collect and pay sales taxes, and even then, it is unlikely that the software will completely handle all situations. It is also highly likely that software of this complexity will quite expensive.
The pending legislation has provisions in it to try to help in this area. Retailers will supposedly be compensated for the cost of sales tax collection (I will believe it when I see it) and retailers with less than $5 million in revenue would be exempt.
I see this see both sides of this debate even though I would obviously rather not have to face the challenge of collecting sales tax in fifty states. This legislation could be voted on as early as this fall. If you have strong opinions on this issue, now is the time to contact your representatives.