The Rebirth of Taxes
No one likes
paying taxes; but we do like knowing that our garbage will get picked up every week and that our roads will be plowed during a blizzard. Still, there's a reason people don't like the taxman, so it's no wonder the debate over mandatory sales-tax collection is so heated.
Catalogue and online merchants have long enjoyed the advantages of a tax-free environment, provided that they didn't have a physical presence -- or "tax nexus" -- in the state where a given consumer resided. In a 2004 assessment, states were reportedly concerned with the estimated uncollected taxes generated by e-commerce: $3.8 billion, an amount that can only be higher today. To Maureen Riehl, vice president of government and industry relations counsel for the National Retail Federation (NRF), the discrepancy "doesn't make sense."
Well, the states may be cents-less no longer. Congress's proposed Sales Tax Fairness and Simplification Act (H.R. 3396) -- a version of which has been introduced in each of the last three congressional sessions -- aims to give each state the right to require businesses that participate in interstate commerce to collect a sales tax from customers, regardless of the business's tax nexus.
Most states, particularly those that don't impose an income tax -- such as Florida, Texas, and Nevada -- rely on sales taxes to help balance their budgets. "It's the only way to get at consumers that visit your state...and [it] alleviates some of the burden that's otherwise borne by your in-state residents," Riehl says. Given the current state of the economy, it's not surprising that states are eager to get money wherever they can.
The Direct Marketing Association (DMA), however, believes that states shouldn't have this authority; rather, each business should be able to choose for itself where it operates, and under whose jurisdiction. After all, says Mark Micali, vice president of government affairs for the DMA, businesses that don't have a physical presence are choosing to do without the in-state benefits associated with tax collection: being a part of the community, hiring local employees, contributing to the political environment, and other rights assumed by a corporate citizen. Without that, he says, out-of-state companies are "solely responsible to the vagaries of what the state wants to do."
To this point, the NRF is in complete disagreement. Out-of-state businesses, Riehl says, "use [the] roads...[and] get to take advantage of the court system [or]...if there's an accident and the police or firefighters are involved." These are legitimate costs of doing business, she says, especially if a particular company is dependent on shipping. "It's not the information superhighway," Riehl adds. "It's a real highway -- and those take money not only to build but to maintain."
Perhaps the most significant grievance expressed by the DMA is that the proposed law fails to address the primary objective of "simplification." In a hearing last December, the DMA's tax counsel warned of the bill's many failings: no streamlining of the estimated 7,600 varying tax rates across the country; no alleviation of the burden of tax collection, remittance, and audits; and no guarantee of fairness in terms of vendor compensation for tax collection.
Typically, store owners spend an average of 15 percent to 20 percent of their time making sure they're complying with sales tax laws of differing jurisdictions. Now, "the onus [will be] on the state," Riehl says, and the state will have to turn to technology to define with certainty the tax rates specific to each individual consumer's ZIP Code.
While the NRF does agree that vendor compensation remains an important issue given the costliness of the system, the act will require that any state mandating tax collection also assume all costs.
To be sure, different regions have different needs; that makes it politically unfeasible to require uniform tax rates. Riehl explains that, if passed, the act strives for simplicity by harmonizing the tax bases of both state and local governments. Sales tax on food, for instance, varies: Some jurisdictions choose to tax food purchased in restaurants but not groceries.
At the competitive level, e-commerce retailers argue that the threat of taxation is stifling their growth while brick-and-mortar store owners say it's a matter of fairness. Tim Lyons, a spokesperson for the department-store chain JCPenney, says he can't directly attribute any loss of business due to sales-tax collection, but he believes the real issue is about the basic numbers. "If [the consumer] is comparing a like product from two different sources -- one, you're going to get charged five to eight percent more for sales tax, and the other you're not -- it's a pretty stark comparison."
There are different costs associated with each business model. At the simplest level, e-commerce pays for servers, brick-and-mortar pays for property. Operating remotely is cheaper overall, so will a sales tax really level the playing field? To Riehl, the answer is pretty clear. "If you're going to put yourself in the marketplace, these are the rules of the game."
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