Mellody Hobson talks to listeners about the change in online shopping on this week’s “Money Mondays.”
Mellody, you want to talk to us about online shopping today.
That’s right, Tom. And I’m afraid I don’t have great news for most people. Last week, Congress cleared the way for a bill about online sales taxes known as the Marketplace Fairness Act, and it’s going to mean big changes for businesses and consumers. Right now, if an internet business has no physical presence in the buyer’s state, it doesn’t have to charge tax on the sale. The onus is left on the buyer to report the purchase—which can be done on your state income tax form. In reality, practically no one does this, so taxes go uncollected.
Under the proposed law, sellers would have to pay the sales tax to whatever state they ship the purchase to. This levels the playing field in that pure online retailers, such as Amazon.com, would be subject to the same rules as Walmart.com. Because Wal-Mart has actual stores in every state, it is required to collect sales tax on every transaction. This is not small potatoes. U.S. shoppers spent $225 billion online last year, so we’re talking about up to $24 billion in sales tax that now goes uncollected.
Okay, so who wins and who loses?
The winners are local economies who will collect all that tax money and the losers are consumers—who will have to pay it. Also losing are online businesses, who will have to charge more for their products in order to collect the tax.
On the winning team we have the mom and pop shops: Traditional brick and mortar storefronts have had a hard time competing with online giants, and those that have managed to stay in business have been subject to “showrooming,” when shoppers inspect their products, then leave the store to buy the same thing on the internet, finding lower prices and avoiding sales taxes. The bill would cause online retailers to lose that tax edge.
But online marketplace Amazon is on board. Why?
Most importantly, Amazon has already begun building facilities in states it has traditionally avoided in an effort to expedite delivery times, so it has to pay sales tax to an increasing number of states anyway. This was a calculated change in strategy that garnered the company an enormous competitive advantage. With the new warehouses, they ship quick—even offering same day delivery in ten cities. If they can’t beat on price, they can win on speed. Furthermore, 40% of everything Amazon sells is sold by third parties, who are charged 10-15% by Amazon for the privilege. Now Amazon will also be able to charge those third parties an additional fee for collecting the tax on their behalf. This means Amazon is poised to make money collecting taxes.
Also fueling Amazon’s enthusiasm: America has an estimated 9,600 state and local taxing authorities. State governments would be required to provide free software to internet retailers to calculate sales taxes, and they would be required to “simplify” their tax codes, but if you know anything about taxes, it’s that they’re complex by nature, and it could be an expensive and time consuming undertaking for any business. Amazon, on the other hand, is big enough to absorb the costs of any potential regulatory burdens giving it a competitive edge over smaller online businesses. Those smaller companies are the ones that will feel the sting the most because they needed that tax advantage and can’t afford to keep pace with compliance. But I want to be clear: the SMALLEST businesses won’t be affected. Online retailers with out-of-state sales of less than $1 million a year would be exempt, so the granny knitting socks and selling them on etsy is okay.
When would the bill go into effect?
A final vote in the Senate passed last week. When the House will take up the issue is uncertain. Don’t put away your credit card, yet, though. Before requiring online retailers to collect tax, states would first have to pay for software that makes collection easier. States and localities would also need to simplify their tax system—they’d have to have a single tax agency, a single tax return, and a single audit before they could require online retailers to collect.