8 Reasons An Internet Sales Tax Will Hurt Online Retailers: Part 2

Last week, every news medium was buzzing about the Internet Sales Tax bill (Marketplace Fairness Act) that passed the US Senate and now moves to the House of Representatives for further wrangling. In my last blog post (How The Internet Sales Tax Bill Will Affect Online Competitive Pricing, Part 1), I discussed what the bill is about. Today I'm writing about some of the ramifications of this bill re competition, competitive pricing, costs, customers, and climate in the online retail world.

Quick Facts About The Proposed Internet Sales Tax Bill:

* The tax is supposed to generate $22 Billion to $24 Billion in annual revenues to state and local governments, although not all states want it.

* It's a tax that online retailers were supposed to be collecting anyway.

* Online retailers with annual sales below $1 million would not have to collect these taxes.

* States must provide free computer software to help retailers calculate sales taxes, based on where shoppers live.

* States are supposed to establish a single entity to receive Internet sales tax revenue, so retailers don't have to send it to individual counties or cities.

If this legislation goes through, here are some of the ramifications for online retailers:

1. Fight For Customers And $$$ Will Intensify. Despite the convenience, customers no longer benefiting from not paying online sales tax could lose their incentive to shop online; and when they do (shop online) they may not buy as much.

* There'll be discount and loyalty battles between Internet and Brick and Mortar retailers to woo, win and keep customers.

* Brick & Mortar retailers will emphasize the advantages of actually touching, feeling, and seeing the products in their stores.

2. Pricing Competition Will Be A Major Factor. As this bill levels the playing field between Brick & Mortar and online collection of taxes, online retailers must watch costs and pricing more carefully than ever. Places to make up costs could be in inventory, marketing, or shipping.

3. Existing Online Businesses Will Be Squeezed. Low-profit-margin online businesses will have the biggest problem. Those selling high cost goods in high sales tax states will feel big effect. And low-profit-margin businesses which sell expensive products will also be hit. 

4. Internet Business Development Will Be Dampened. The Internet sales tax will deter online growth. New business will be discouraged at a time when our economy is so anxious for entrepreneurs to create jobs and economic activity.

5. Bigger Businesses Will Stifle Competition. Big retailers will have big advantage in being able to spread the cost of compliance over their larger sales base, while smaller retailers (those making just over $1 Million and up) will struggle.

6. It Will Be Complicated. Although supporters say the bill makes it relatively easy for Internet retailers to comply, the tax bill is complex. If the system isn't simplified across the board, businesses will be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions.

7. It Will Cost Online Retailers Time And Money. The states are supposed to provide tax-tracking systems for collecting the taxes, but launching, administering and maintaining these systems will be expensive and time consuming for online retailers.

8. Federal And State Governments Could Abuse Their Powers. Opponents point out that it gives the federal government and state government too much power over this issue and could subject online retailers to a slew of state and local audits.

Why Brick & Mortar Stores Are Happy About The Internet Sales Tax Bill:

As far as Brick & Mortar stores are concerned, this sales tax will level the playing field, give them new life, help them get over the showrooming effect; focus on expanding their brand, product offerings, and service; and force more fair competition.

Bottom Line For Your Bottom Line:

As competition grows keener, the use of advanced pricing intelligence solutions will be more esential than ever. 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. 

The only good news for online retailers is that it will take a number of months to implement the legislative and administrative changes needed to enforce the legislation after the bill is passed.  

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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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