The Real Reason Amazon Flip-Flopped On Internet Sales Taxes

Proponents of the Marketplace Fairness Act claim it’s about fairness to traditional retailers and cash-strapped states.  But the flip-flop by, now one of its biggest proponents, illustrates the debate truly is about manipulating public policy to gain a competitive advantage.

Today, only companies with a physical presence in a state, such as a store or warehouse, are obligated to remit sales taxes to that state. The Marketplace Fairness Act would change all that.  Rather than “fix” a tax loophole, the legislation would undermine a protection against taxation without representation.

No matter that catalogue, Web-based or telemarketing companies’ only contact with a state is shipping products there by common carrier or that the businesses have no political voice there and would receive none of the state services its taxes fund.

MFA proponents often claim consumers browse at brick-and-mortar stores, then order online to avoid sales tax. But in a recently released survey, The 10 Myths of multichannel, online consumer shopping trends, consulting firm PwC found 23 percent of respondents “research consumer electronics online and then go to a store to purchase the product, compared to only 2 percent who do it the other way around.”

When asked to rank the most important factors that attract them to shopping in a physical store, 73 percent chose ‘Ability to see, touch and try merchandise’ – an attribute online stores can’t match.

These findings also explain in part why Amazon switched sides in this fight. To cut shipping times and get products to customers quicker, it established distribution centers across the country.

This meant it had tax obligations in several more states, which gave it more in common, from a tax standpoint, with Target, Best Buy and other big-box retailers than with independent online sellers.  So it joined with the big-box retailers’ campaign to promote the tax, which gives large retailers an advantage over smaller concerns.

MFA would subject online retailers that gross more than $1 million in annual sales – far below the government’s designation for a small business – must collect these taxes. And not just in one state, but potentially in all the nation’s 9,600 distinct tax districts.

Thus, a business that never has advertised in a state, never targeted any marketing there, never established a presence there, nor done anything to attract customers there other than produce a website visible from the entire world, will have to pay sales tax there. Cue up Due Process alarms.

Tax software manufacturers, who stand to profit from all this, assure legislators their products will protect merchants from liability.  But any functional tax system involves government verification at some stage.  Tax software companies also tout the “free” nature of the products to sellers.  That doesn’t address the costs associated with installing, integrating and maintaining multiple state-sanctioned software programs.

Allowing brick-and-mortar stores to tax at the point of sale but subjecting remote sellers to a maze of destination-based tax obligations simply shifts inequity from one type of retailer to another.  It’s rent-seeking, plain and simple.

Recently, David French, senior vice-president for government affairs at the National Retail Federation said: “The law today is a 20th-century interpretation of an 18th-century document that is holding back the entire retail industry as it adapts to 21st-century consumer preferences and demand.”  The pesky document is, of course, the Constitution.

Lawmakers should remember technology and political alliances change, but sound principles are timeless.  Political accountability and healthy tax competition among jurisdictions matter now as much as ever.

States are in it for the money and big retail is in it for the competitive edge. But if anyone’s interested in fairness, there are some good solutions to current inequities.

The best option is an origin-based tax for all types of retailers.  Everyone calculates tax at the point of sale and remits to that tax jurisdiction.  No one has the hassle of tracking down each customer’s taxing authority.  Every type of retailer is treated the same.  This system addresses excess compliance costs, consumer privacy concerns and unfairness in the playing field.  It also promotes tax competition among jurisdictions and preserves political accountability for tax authorities.

Can principled House members resist the pressure from tax collectors back home and an army of retail lobbyists in Washington?  Hope springs eternal – but finding a few Canadian retail sites you like can’t hurt.