Mining Online Revenues

With many states facing revenue shortfalls, there is a renewed intensity over how state governments can collect sales taxes from online retailers. New York, Illinois and other states have already passed legislation requiring online sellers with a presence in their states to collect sales taxes from residents.

Clicking Through

While the legislation is aimed at large enterprises like Amazon and Overstock.com, small online affiliate marketers might be the businesses most affected by the new laws. Amazon has dropped affiliates in some states that have passed similar measures. With no affiliates in a state and no other type of presence, Amazon is not required to collect sales taxes under a 1992 U.S. Supreme Court ruling, which determined that only companies having a physical location in a state were required to collect sales taxes. Given such a complex variety of state and local tax rates and rules, requiring all online retailers to comply universally with all state tax codes would be unreasonable and far too cumbersome, according to the decision.

A Simple Solution?

Given that states today face more than $100 billion in combined budget deficits, there is a push toward simplified tax codes and administration. Certified software, which would enable a federal solution for collecting sales taxes and directing them to the states, is gaining momentum. This initiative comes from a consortium of 44 states, the District of Columbia, large brick-and-mortar (so called big-box) businesses and other stakeholders. Their goal is to level the retail playing field by having online retailers collect sales taxes from buyers in the states that have ratified legislation (which conforms to the simplification standards set by the Streamlined Sales Tax Governing Board). The idea is that this will make collecting sales tax easy, rendering the 1992 ruling obsolete. So far, 24 states have passed conforming legislation and several others are considering it.

Some states are not waiting for simplification and are moving ahead with their own solutions aimed at getting more revenue from online sellers now.

Illinois, for example, recently passed legislation requiring online sellers with affiliates in the state to collect sales taxes. Oklahoma has passed similar legislation, and Texas and California are considering their own measures.

Fair or Misguided?

Walk-in retailers say it is only fair that if they are required to collect sales taxes from their customers, online retailers should have to do the same, and that failure to require it creates an unfair advantage. Shoppers, they argue, browse real stores for products they are interested in and then buy from an online store to avoid paying sales taxes.

In addition to philosophical differences, opponents point out that online retailers already must figure shipping costs, which negates the sales tax advantage. Further, they argue that they have the disadvantage of shoppers not being able to physically handle goods, plus the lingering reluctance of many buyers to conduct financial transactions online. Opponents also argue any increase in sales tax revenues will be nullified by a reduction in state income taxes as affiliate marketing companies lay off workers, leave the state or go out of business. Even with the current sales tax model, brick-and-mortar stores account for more than 95 percent of retail sales.

It seems inevitable that the era of tax-free online purchases will eventually end, either by individual state legislation or by Congress enacting laws that enable the federal government to oversee, collect and distribute online sales taxes to the states.

What Does It Mean To You?

For online shoppers, the Internet will likely continue to offer bargains because online retailers retain the advantage of lower overhead costs. Those bargains, however, might become harder to find. If the comparative costs narrow enough, brick-and-mortar stores could experience a surge in sales. One variable, however, is convenience, which for many buyers is the reason they shop online.

If you are an online store owner or affiliate marketer, prepare now for potential changes in how you do business. Wal-Mart is already courting affiliates in Illinois, anticipating that Amazon will drop affiliates in that state. Some companies will restructure and relocate offices and distribution centers to more tax-friendly states – and maybe even offshore.

Whatever the outcome of the sales tax battle, online sales, which were more than $160 billion in 2010, will continue to be a significant part of the retail sector and offer endless business opportunities for creative entrepreneurs.