Financial Fellow

Written by J.P. Wicklein

     Recently Amazon announced their best year ever despite other retailers reporting one of their worst holiday seasons in years.  How did Amazon accomplish this?  Through two distinct advantages they have over traditional, brick-and-mortar retailers:  1) Amazon doesn’t have the overhead associated with a physical store and 2) They don’t charge customers sales tax.  As a result, Amazon can often sell items for less than many of their brick-and-mortar competitors. 

The sales tax situation

     In most cases brick-and-mortar retailers that sell online, such as Best Buy, are required to charge customers sales tax on their purchases if they have a physical location in the state which the item is being sent to.  Amazon, a company without a physical sales location in any state, isn’t legally required to charge or collect sales tax.  This gives Amazon an advantage over their brick-and-mortar competition.  Some would say an unfair advantage.  The brick-and-mortar retailers aren’t the only ones losing out.  State and local taxing entities are missing out on sales tax revenue they feel they’re entitled to collect from online only retailers.

A battle is brewing

     Due in part to the lobbying of brick-and-mortar retailers and the work of state governments, efforts are underway to pass a law forcing online only retailers to start charging customers sales tax.  That said, online only retailers can’t just flip a switch and start charging sales tax.  Online only businesses aren’t presently equipped to deal with tens of thousands of different taxing entities.  Additionally, there is a good amount of gray area on how to tax certain items. 

     To help implement a simpler, quick solution many brick-and-mortar retailers and 22 state governments are backing the efforts of the “Streamlined Sales Tax Governing Board” (SST).  The SST is working to get states to simplify their tax laws for online businesses.  In exchange, states hope to remove a major obstacle to collecting sales tax from online only retailers. 

     The ultimate say in the matter will fall to the U.S. Congress.  They have the power to create a new law forcing online only businesses to collect sales tax from all their customers.

     So, in short the battle lines up like this:  State and local governments along with brick-and-mortar retailers vs. online only retailers and the consumer.  Ultimately I think the former will win out.  Why do I believe that the states and brick-and-mortar retailers will eventually prevail?  Simply put, if something seems too good to be true, chances are it is. 

All good things come to an end

     Six to ten years ago people were downloading music off file sharing sites like Napster and Kazaa for free.  At the time the “too good to be true” feeling was held by many people getting all their music online for free.  Although it took the music companies a while to stop free file sharing, they eventually did.  The same principal holds true for avoiding sales tax by shopping online.  Government may be a little slower than private industry when it comes to fixing problems but, between the lobbying efforts of brick-and-mortar retailers, the SST, and the extreme financial strain the recession is putting on state budgets the tipping point for the U.S. Congress to enact legislation forcing online only retailers to collect sales tax may be near. 

     So continue to buy things online without paying sales tax while you still can. You may not be able to download every Beatles song for free anymore but at least you can purchase all their albums without paying sales tax. 

Photo by: Robert Scoble