Online Sales Tax Will Create Ecommerce Chaos

Oct 09, 2012 12:56 AM  By

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Steve DelBianco, executive director of NetChoice, said there is “big momentum” for federal legislation that would allow states to require online retailers to collect sales tax – but thinks it would throw the ecommerce world into chaos.

“It’s a nightmare coming your way,” DelBianco said at last month’s National Etailing and Mailing Organization of America fall directXchange conference. “It would be a pretty crushing burden to handle.”

Should one of the three pending bills (Main Street Fairness Act, Marketplace Equity Act, and Marketplace Fairness Act) become law, DelBianco said ecommerce and catalog companies would receive free software to help administer the collection of sales tax. “It’s free the way a puppy is free,” DelBianco said. “It’s a nightmare coming your way.”

If enacted, the collections of sales tax by online retailers would repeal the 1992 Supreme Court decision, Quill Corp. vs. North Dakota, which said states are not allowed to require out-of-state companies to collect sales taxes unless that company has a physical presence, such as a store or warehouse, in the state. Small companies (those with sales of $1 million or less nationally or less than $100,000 in a given state) would be exempt from the requirement.

Burdening remote sales, including ecommerce, with unrealistic administrative tax burdens will increase the cost of doing business on the Internet, DelBianco said. Pending legislation would require ecommerce sites and catalogs to calculate tax rates for over 9,600 tax jurisdictions, each with its own rates and sales tax holidays; file returns for each of the 46 taxing states; endure potential tax audits from 46 state tax authorities; and invest in computer systems changes and additional accounting resources, DelBianco said.

States believe that the lack of remote sales tax collection is a $23 billion loss in revenue. The Direct Marketing Association completed a study a few years ago and found that the loss is $4 billion. Forrester Research also conducted a study and found the loss was about $3 billion. DelBianco has heard estimates ranging from a loss of $5 billion all the way up to $25 billion.

If any of the three bills is enacted, DelBianco said, Congress must require true simplification of the sales tax laws so online merchants won’t incur countless administrative problems in the collection of sales tax. To make the sales tax collection process easier, DelBianco said, there needs to be a single tax rate per state for remote sales; there should be a single set of definitions for states; a common sales tax return for all states; software should be provided for rates, filing, and payment; and there should be compensation for tax collection.

Especially since it’s a presidential election year, DelBianco is unsure if any of the bills will be acted on this year, but he said the only way merchants can prevent any of them from becoming law is by contacting congressmen and senators. “Engage today or prepare to pay,” DelBianco said.