Why Online Sales Tax is a Good Idea

| May 9, 2013 | Hit The Market | , , | 4 Comments

Two weeks ago I got an e-mail from eBay (NASDAQ: EBAY). It was exactly the kind of e-mail that typically gets caught by my spam filter and I never see. But something caught my eye and I decided to open it.

So eBay doesn’t want the proposed online sales tax to become law? “Big surprise,” I thought. After all, eBay itself is an online marketplace and PayPal (which represents 40% of eBay’s revenues) would be hurt if an online sales tax actually reduced online commerce. So it makes sense that eBay would join the likes of Amazon.com (NASDAQ: AMZN) in opposing such legislation.

I am usually very cynical when I see a company taking a stand on an issue like this. But to eBay’s credit, the company didn’t say “no online sales tax.” In fact, what I took from the letter was that eBay was comfortable with the change under certain conditions:

eBay rightly points out that many online merchants are small businesses themselves and that tracking tax policy in every jurisdiction it conducts business in would be a tall order. eBay says it supports the small business exemption above because it would protect small online businesses. And while that is technically true, eBay’s real interest in advocating for those businesses is probably rooted in the fact that it relies on the transaction fees from those small online businesses as its financial lifeblood.

I am receptive to arguments that the burden of paperwork behind tracking taxes on transactions in thousands of jurisdictions is too great for these businesses. That said, the simple fact is that an online sales tax will level the playing field for retailers.


How the system works currently

Let’s imagine that I bought a book on Amazon.com for $10. I’m having it shipped to my house in Burlington, Vermont. Since I’ve got Amazon Prime – and I like simple numbers for my examples – shipping will be free.

If you are a business in Burlington, VT you have to charge me a 6% State of Vermont sales tax and a 1% City of Burlington sales tax for the same book I bought on Amazon without paying tax. So in order for you to match Amazon’s price of $10.00, you have to sell it to me for $9.34.

After adding in the 7% total sales tax of $0.66, I have still paid $10.00. But the local merchant in Burlington, VT was only able to collect $9.34 for the same book Amazon sold for $10.

It is easy to see that Amazon is able to offer lower prices because of the sheer volume of transactions. But what I have just described is an additional competitive advantage, one that Amazon’s founder was well aware of when he founded the company and located it within the State of Washington. 

Call it what you will, the strategy is essentially to help consumers avoid local and state sales taxes.

Even if a local “brick and mortar” business could compete on the price of an item, it can’t compete on tax. No matter what, the local merchant will have to include this tax in the final cost to the consumer. This is why companies like Best Buy (NYSE: BBY) can never win a price war against Amazon.

That is, unless an online sales tax helps to level the playing field. 


The Bottom Line

Am I excited to pay more for items online than I used to? No, I am certainly not. The simple fact is that this legislation will require those who shop online to pay more for the items they purchase.

I do much of my shopping online. But price is only one reason for this. There are many other reasons to shop online, such as selection, ease of use and the convenience of shopping from home.

I have no doubt that an online sales tax will do nothing to derail the societal shift towards online shopping and that consumers will continue to win when they shop online. 

The real winner if an online sales tax is assessed is the free market. And the free market rarely wins when tax policy is expanded.

If this tax proposal passes business will be forced to compete using more traditional competitive advantages: volume-discount sourcing, service, and overall customer experience. The ability to evade taxes shouldn’t be a competitive advantage.


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4 Comments

Nick G May 9, 2013 at 2:23 pm (Reply)

One thing you’re missing here is that under the current tax code you are required to pay sales tax on items purchased online that you didn’t pay tax on through the online retailer. Now, this is something that almost nobody does, and the IRS doesn’t enforce it but all this is doing is make people pay taxes they are currently skipping out on paying.

Dan H. May 11, 2013 at 11:13 am (Reply)

While I agree that “tax evasion” should not be a business model, I’m not sure I agree with the statement that it is the free market is the real winner. I perceive it as a “fairness” issue. e.g., tax evasion should not be encouraged nor provide a competitive advantage. However, what seems to be missing from most conversations on this topic is the recognition of who will, or should, benefit as well as, enforce this law. Remember, we are talking about the collection of State and Local taxes, not Federal taxes (as least, not yet). While the bill transcends state boundaries, and therefore needs to be passed at the Federal level, collection and enforcement might best be left to the states, etc. that is unless we want to go ahead and lay the ground work for for Federal Sales Tax. In that case, by all means, have the IRS audit and enforce the collection and distribution of tax revenues to the various levels of government entities. Although it might be seen as more efficient for the IRS to perform those tasks, regardless of whether a Federal Sales tax exists, lets remember it is the State and local entities that will benefit from these added tax collections. Indeed, I suspect that although sales taxes are often collected on online transactions, taxes due local authorities, such as city, school districts, etc. are usually avoided. So I think the real beneficiaries will be the local tax collectors.
Implementation should no longer be onerous. Indeed, even eBay could develop…or use and existing software…to do this. And it needn’t be limited to any level of business if done via third party. The purpose of the internet was/is not to provide a de facto subsidy for small business…just level the playing field…across business entities and sizes, not to encourage tax evasion.

Jay May 29, 2013 at 9:04 pm (Reply)

Great points, thanks for reading.

Meteorlady May 12, 2013 at 11:00 am (Reply)

What you are missing here is that some of us will continue to grow. I used to have a sign company, but collecting sales tax for the state of Washington was a huge job for me. I had customers that strung me out 30/60/90 days, yet I had to pay the sales tax on the transaction the day for the month the sale occurred. So each month I paid an accountant to do that for me. If the government keeps taxing I have no incentive to do better and grow my business. That’s the bottom line. I am paying enough for regulations (mostly paperwork reporting), and city, state, county and federal taxes; then add in fees and permits. I would also have to figure out what the taxing district I am selling into charges as they are all different. As a consumer I would have no incentive to purchase on line because I can buy the same product here in my own region.

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