NEW YORK -- Small business owners may be closer to losing an advantage they've enjoyed during the e-commerce boom -- being exempt from collecting sales tax in states where they're not located. And they're worried they will have to spend more money in the process.
Under federal law, a state or local government cannot force a company to collect sales tax on a purchase unless the business has a physical presence in that state. The physical presence could range from an actual store to an office, warehouse or distribution center. The sale could be conducted online, over the phone or through mail-order.
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The arrangement saves money for shoppers who use price comparison websites or mobile apps, and those who spend time surfing for the best overall deal.
But Washington lawmakers currently have several bills in the works that would end all that by forcing companies to collect the tax. Businesses are split over the issue.
On one side are small retailers who say they wouldn't be able to bear the costs of collecting the tax and filing reports and tax returns the states and local governments require. They're worried that they'll have to buy software, hire staffers and deal with the continual hassle of keeping up with collecting tax from states and thousands of municipalities.
Headsets.com, for instance, might have to hire two staffers to handle the administrative work if what's called remote tax collection becomes law, says CEO Mike Faith. The company has operations in California and Tennessee, but sells to all 50 states. Currently, federal law only requires the company to collect tax in those two states.
Faith expects the law would force him to hire workers to help his San Francisco-based company comply with it.
"It's useless employment. It doesn't add value to the company," he says. "It's just another cost burden."
On the other side are in-state sellers and larger retailers with physical locations dotted across the country who sometimes lose business to competitors who don't have to collect the tax. Even if two retailers charge the same amount price for an item, many shoppers choose the seller that doesn't collect taxes to reduce their overall cost.
"It's a problem that needs to be addressed. It's an unlevel playing field," says David French, a lobbyist for the National Retail Federation.
And on yet another side, are the state and local governments which stand to collect billions in uncollected revenue if a bill makes it through Congress. States have wanted the tax money for decades and are particularly anxious for it now because their tax revenue is down following the recession and the housing crisis. The payoff could be substantial. In 2012, there was much as $11.4 billion in uncollected taxes on Internet sales alone, according to an estimate by researchers at the University of Tennessee.
Decades-long desire for change
State and local government officials have wanted to change the law for years, even before the catalog boom of the 1980s and the Internet boom of the `90s.
Small business owners have resisted along the way. They argue that the burden of keeping up with the estimated 15,000 different sales tax rates charged by the 7,500 to 9,600 jurisdictions made up of states, counties, cities and towns, is just too much.
They have a point. Knowing how much to tax, and where, can be complicated. For example, Elgin, Ill., a suburb of Chicago, is located in two counties, Cook and Kane. In Cook County, Elgin's sales tax on general merchandise is 9.25 percent. In Kane, it's 8.25 percent. The state's base sales tax is 6.25 percent.
What is taxed also varies widely. In Massachusetts, baby oil is tax-free, but baby lotion and powder aren't. In states including New York, there's a tax on shipping charges on items. Others, including California, don't charge if you get merchandise delivered by the U.S. Postal Service or delivery services like UPS and FedEx.
The effort to change the law intensified as the growth of the Internet increased and companies' out-of-state sales volume swelled. Many sellers felt protected by a 1992 U.S. Supreme Court ruling that states could not force out-of-state sellers to collect sales tax. But the court, in effect, invited Congress to create a law that would give the states the authority to require that taxes be collected.
States have a lot of incentive to go after the revenue. The combined budgets of all the states had deficits of more than $100 billion a year from 2009 through 2012, primarily because of the drop in tax receipts during and after the recession, according to the Center on Budget and Policy Priorities, an organization that studies tax issues.
Three bills introduced
Three separate bills were introduced in the last Congress that would authorize the states to require remote sellers to collect taxes. In the Senate, the Marketplace Fairness Act had bipartisan support but did not come to a vote. Illinois Sen. Dick Durbin, one of the bill's sponsors, has told The Associated Press the bill was tabled because of concerns by Sen. Max Baucus, a Montana Democrat, about the burdens tax collection would place on companies in his state, where there is no sales tax.
But the burden small business owners fear may not be as bad as they think. The government would likely require that states make the process easier for small companies. And the smallest of these businesses are expected to be exempt. The proposed Marketplace Fairness Act exempts businesses that have $500,000 or less in sales from remote states. But Durbin says that number is open to negotiation.
"That's not set in stone," Durbin says. "I want to come up with a number that spares anyone from concern."
He also says that the tax computation software will have to be user friendly.
"This is the only way we can sell this," he says.
There's already some precedent -- and a process -- for making sales tax collection less burdensome. In 1999, the National Governor's Association and the National Conference of State Legislatures created the Streamlined Sales Tax Agreement to make taxes easier to collect. The Streamlined Sales Tax Governing Board, or SSTGB, was formed to carry out the agreement. To help reduce the hassle of tax collection, the SSTGB has contracted with software developers to come up with programs designed to compute the correct tax.
One such program, TaxCloud, is designed to keep track of changes in state and local tax laws and will file sales tax returns on behalf of sellers, according to David Campbell, CEO of The Federal Tax Authority, one of the SSTGB's developers.
Never that simple
Laura Zander, a retailer of yarn and sewing suppliers, is skeptical. She also has a background in software development.
"It's really easy, free software, but it's never that simple," says Zander, owner of Jimmy Beans Wool in Reno, Nev. "You just can't program it as easily as they say you can."
Zander, who had $6.5 million in sales last year, believes that compliance with the law would be expensive.
"Think about the complications -- on a monthly or quarterly basis, filing and tracking payments," she says. "That's an extra $50,000 or $75,000 a year in programming fees, bookkeeping, management. That's a lot."
The Electronic Retailing Association, a trade group that's fighting the legislation in Congress, also says that it will be expensive for sellers to comply.
"Even if you have software that's good, to integrate the coding on the (seller's) end of these elaborate sales systems is a pretty big thing -- even for an Amazon," says Bill McClellan, vice president for government affairs for the ERA. "That will leave these little guys out in the lurch."
Other companies are taking the prospect of implementing new software and collecting the tax in stride.
"If it's imposed on us, it's something we have to deal with. It's not going to break us," says Henry Posner, a spokesman for B&H Photo a New York retailer of photo and electronic equipment that has a large online business. Posner declined to reveal the company's sales figures.
But Dean Davis, who sells trucks, back hoes and other big machinery, says that because he's not a typical Internet seller who could benefit from software programs, his company couldn't take advantage of the streamlined tax collection process. His Narrows, Va., business, Affordable Trucks & Equipment, advertises online but closes deals over the phone and via email.
"Even if it's a streamlined procedure, it would still be extra work," he says. "You have to file a report, whether it's monthly, quarterly or annually."