Sales Tax Complications (Letter to the Editor)

by Eric Caldwell  on Monday, Oct. 22, 2012 12:00 am  

I just read the Oct. 8 article "Lawmakers Join Fight for Online Sales Tax Collection."

While I enjoyed the article, there is another side to this story: the drawbacks and impact on online retailers of collecting sales tax for all 50 states. Another missing piece here is what about the brick-and-mortar stores that do both?

Some online retailers wouldn't mind collecting sales tax for all 50 states and mailing checks, but what happens when the counties and cities within those states want their cut of online sales tax revenues? Big expenses! My best guess is there are over 9,600 sales tax codes in the U.S (based on some Google queries) which would have to be programmed, updated and maintained for each e-commerce system.

Now, how would that impact online retailers if they had to keep up with that many tax codes in their system? How do you set up an e-commerce system to collect sales tax for states, counties and cities? Once counties and cities start pounding legislators to introduce bills allowing them to collect sales tax - and they will - my belief is online retailing will crumble and put tens of thousands of e-tailers out of business.

If this were to happen, the burden will have shifted far in favor of brick-and-mortar businesses that only have to collect and pay state, maybe county and maybe city sales tax. If that scenario were to play out, think of the unemployment impact on a national scale, since most of these businesses employ anywhere from one to 50 employees each.

I think legislation has to be introduced at the federal level setting a flat state sales tax rate for online purchases, along with legislation preventing cities or other municipalities from collecting online sales tax. If laws are created in a vacuum, this will create an accounting nightmare, even for organizations the size of Amazon.com.

Now realistically, no company will sell into 9,600 plus markets at once, but imagine the nightmare for retailers having to keep up with that many changing tax codes and trying to keep their small e-commerce systems up-to-date! This would be a huge expense that could also shut down all but the largest online retailers.

What the states and other municipalities have not thought through is:

  • If the state does collect online sales tax, how do I keep all online retailers up to date with changes in state level tax codes?
  • If state laws allow counties and cities to collect sales tax, how will those municipalities be able to track and inform e-tailers of their tax code changes?
  • How much would it cost to put in systems to track and update retailers if this did happen?
  • How can you audit sales into your state and punitively collect sales tax across state lines?

So many questions. Those systems will cost a lot of money, and how much money will be left over for municipalities after you install and pay people to maintain those systems?

I know this sounds like gloom and doom, but all these states and municipalities think there is a goldmine of sales tax revenue to be had from online sales, when in actuality there really isn't. The IT overhead and infrastructure costs could far outweigh the fiscal benefits.

If Arkansas Business decides to revisit this piece with a counter to the potential impact of online sales tax collection, let me know. I would be more than happy to help track down information and contribute.

(Eric Caldwell is CEO of Web-Jive LLC of Little Rock.)

 

 

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