5 Reasons Online Retailers Should Worry About Impending Online Retail Sales Taxes

According to statistics by digital business analytics company comScore, Americans spent a whopping $37.2 billion buying online this holiday season. Surprisingly, no state or local sales taxes were paid on the majority of those purchases. That’s because, until now, online retailers with no physical presence in a particular state were exempt from paying taxes on online retail sales.  That looks like it’s about to change. In November 2011, a bipartisan group of Republican and Democratic Senators introduced the Marketplace Fairness Act, a bill that would authorize the 45 states with sales taxes to require Internet merchants selling to customers in the U.S. to collect online retail sales taxes.

Two important elements of the proposed legislation would be that: 1) online retailers doing less than $500,000 a year in sales will be exempt from collecting the tax; and 2) the states will be required to simplify their present sales tax systems, which are all different and unique from one another. (Janet Novack, The Last Tax Free Cyber Monday, Forbes, Nov. 23, 2011). 

If this legislation goes through (there have been many attempts over the past several years to have online retailers collect this sales tax) online retailers might wonder, “For whom will the Marketplace Fairness Act be fair?” -- and prepare themselves for the following aftershocks:

#1. Tax tracking systems will be expensive and complicated

The typical online retailer does not have the resources or the staff capabilities to implement any such new law – particularly since it involves 45 different states, with 45 different sets of sales tax laws. The cost to each online retailer of implementing the new law will likely require new hardware and software; consultants to help figure out and assure compliance with the law; and other education, tracking and reporting activities.

#2. The exemption guidelines could be altered once they’re in place 

Once the government puts the framework in place to properly collect out-of-state tax from Internet retailers, there is a very real danger that the states could reduce or remove any dollar-amount exemptions put into the original program. (PC World Angela West, Why you should care about an Internet sales tax). 

#3. Internet business development will be dampened

Removing another important cost advantage for online retailers might affect those going into, or staying in business, said comScore analyst Andrew Lipsman, noting that online retailers still have an advantage -- "less overhead than brick-and-mortar -- so they can still maintain better competitive prices even with sales tax factored in.” 

#4. Consumers may turn off to online shopping

Online shopping without paying sales tax has been very appealing to consumers. Without that extra “savings,” will consumers seek other ways to save on their purchases?

#5. Competitive pricing strategies will come into play

If sales taxes must be added and collected by online retailers, it will affect pricing. If it affects pricing, online retailers must watch pricing more carefully than ever. In order to watch pricing more carefully than ever, online retailers must acquire, sharpen, and wisely-use pricing intelligence tools.

Who’s For and Who’s Against?

Upholding its system of serving small online retailers, eBay does not want to collect sales tax for online sales. Nor do social media leaders like Facebook and Yahoo. “This is another Internet sales tax bill that fails to protect small-business retailers using the Internet and will unbalance the playing field between giant retailers and small-business competitors,” said eBay’s vice president for government relations, Todd Cohen, quoted in a variety of media. Moreover, Mr. Cohen said, “It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity.”

The original “darling” of Internet retailing, Amazon.com, fought making sales tax payments for years, but finally, under duress, agreed to collect sales taxes from California residents as of September 2012. The chastened Amazon, which also had sales tax collection issues in other states, has now become a strong proponent of the legislation, while simultaneously offering to make its sales-tax-collection technology available as a service to help (its) sellers.

Others obviously wanting the sales tax implemented include retail industry giants Walmart, Best Buy, Target, J.C. Penney, and Home Depot, through their Retail Industry Leaders Association; CEA, the Consumer Electronics Association, which has done a turnabout and now also backs the sales tax collection; and just about every brick-and-mortar retailer in existence.  

If there’s any good news, it is that, despite the huge financial incentive for all the states, it may take years before most of them can manage to implement the legislative and administrative changes needed to enforce the legislation.


If an online retail sales tax comes into being, online retailers will have to sharpen their competitive pricing tools, stay aware of their competitors' pricing, and continue to develop winning strategies to make wiser- and more-competitive-than-ever pricing decisions. In the meantime, online retailers might wish to add their voices and opinions to the discussion, to prevent, alter, or slow the initiation of legislation like the “Marketplace Fairness Act.”

What do you think? Let me have your thoughts below. Thanks. Gilon

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Gilon Miller, CMO

About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
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